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THE 


ELEMENTS   OF   ECONOMICS 


BY 
CHARLES   J.    BULLOCK,    Ph.D, 

PROFESSOR    OF   ECONOMICS    IN    HARVARD   UNIVERSITY 


REVISED  AND  ENLARGED 


silve:r,    burdett   and   company 

BOSTON,      NEW  YORK,      CIIICAfiO,      SAN  FRANCISCO 


HQ2>)\ 


Copyright,  1905,  1913,  igic. 
By  silver,    BURDETT   &   COMPANY 


w 


HE) 

PREFACE 


This  book  has  been  written  in  response  to  a  demand 
for  a  somewhat  shorter  and  more  elementary  work  than 
the  "Introduction  to  the  Study  of  Economics,"  which 
the  author  brought  out  in  1897.     In  order  to  meet  this 
v^      demand,  it  was  necessary  to  make  a  substantially  new 
•^      book,  in  which  the  substance  of  doctrine  and  the  eren- 
^      eral  groundwork  remain  the  same,  but  the  method  of 
*^'*^^  treating  most  subjects  has  been  more  or  less  radically 
altered.     Less  space  has  been  devoted  to  purely  theo- 
retical questions  and  more  descriptive  and  illustrative 
4^,      material  has  been  presented. 

It  is  hoped  that  the  present  treatise  will  meet  the 
needs  of  a  relatively  short  course  for  beginners  in  eco- 
nomics. As  the  work  stands,  it  is  probably  extensive 
enough  for  the  beginning  courses  now  given  in  eco- 
nomics. If  it  is  found  too  long  for  some  of  the  shorter 
courses,  the  instructor  can  easily  adapt  it  to  the  needs 
of  his  class  by  making  a  few  omissions.  The  first  chap- 
ter can  be  treated  in  an  introductory  talk  or  lecture  on 
the  first  day  that  the  class  meets;  and  the  tenth  and 
fifteenth  chapters,  treating,  as  they  do,  topics  that  are 
seldom  discussed  at  length  in  an  elementary  work,  can 
be  readily  omitted.     With  a  few  changes  of  this  sort, 


iv  PREFACE 

the  book  can  be  adapted  to  a  course  of  only  twelve  or 
thirteen  weeks. 

The  author  is  under  obligations  to  various  friends, 
colleagues  and  others,  for  material  assistance  in  the 
preparation  of  this  work.  He  wishes  to  make  special 
acknowledgment  of  the  aid  received  from  Professor 
T.  N.  Carver,  particularly  in  connection  with  the  fifth 
chapter,  and  of  the  constant  help  received  from  Mrs. 
Bullock. 

CHARLES  J.  BULLOCK. 

Cambridge,  Mass.,  1905. 

Preface  to  the  Third  Edition 

In  this  third  edition  such  changes  have  been  made 
in  the  text  as  the  events  of  the  last  six  years  have  made 
necessary,  and  the  statistical  materials  have  been  brought 
up  to  date  so  far  as  that  has  been  desirable  and  possible. 
In  many  cases  conditions  are  so  abnormal  at  the  time 
of  writing  that  it  is  undesirable  to  present  the  very 
latest  statistics  since  they  do  not  reflect  norma-  fact: 
and  relations.  The  chapter  dealing  with  the  labor  prob- 
lem has  been  largely  rewritten. 

CHARLES  J.   BULLOCK. 

Cambridge,  August  i,  1919. 


CONTENTS 


CliAPTER   I 

MGB 

Introduction:  The  Science  of  Economics        .       .       .       .        i 


CHAPTER  II 

The  G3NSUMPTION  of  Wealth lo 

I.     Human  Needs:  Wealth    ,...,,.  lo 

II.    The  Laws  of  Consumption 13 

III.     Statistics  of  Consumption  .......  21 


CHAFfER   III 

The  Production  of  Wealth 29 

I.     General  Survey 29 

II.    The  Factors  of  Production 32 


CHAPTER  IV 

The  Organization  of  Productive  Industry       ....  55 

I.    The  Organization  of  the  Factors  of  Production         .         .  55 

II.     Business  Corporations 60 


CHAPTER  V 

Teh  Laws  of   Production:    The   Variation   of   Productive 

Forces 74 

I.    The  Law  of  Diminishing  Returns      ....  74 

II.     The  Law  of  Economy  in  (Jrgani/.ation       .         .         ,         .  82 

III.     The  Laws  of  Supply ...  .         .         .        .  9I 


vi  CONTENTS 

CHAPTER  VI 


PAGE 

97 

97 

9S 

103 

112 


The  Theory  of  Exchange 

I.    The  Advantages  of  Exchange   .         .         , 
II.     Market  Value    .         c         .         .         .        . 

III.  Normal  Value    ...... 

IV.  Exceptions  to  the  Theory  of  Normal  Value 

CHAPTER  VII 

Money  and  Credit 1 16 

I.     Metallic  Money ,        ,     Ii6 

II.     Credit  and  its  Instruments 123 

III.    The  Laws  of  Money  .         .         ,         .         ,         .        ,128 

CHAPTER  VIII 

Problems  of  Money  and  Banking I43 

I.     Government  Paper  Money         •....,  143 

II.     Banks  as  Institutions  of  Credit 149 

III.     Bimetallism       .........  158 

CHAPTER   IX 

Monopoues 169 

I.     Introduction ,        ,        ,        .169 

II.     Monopoly  Value        .        .        ,        ,        ,        ,        ,        •I73 

III.  Natural  Monopolies  .         .        ,        ,        ,        .        ,        .176 

IV.  Capitalistic  Monopolies     .        .        .        .        .        ,        ,182 

CHAPTER  X 

Railroad  Transportation     ........  202 

I.     Railroad  Competition  and  Coml)ination    ....  202 

II.     Railroad  Rates .  212 

III.     Public  Control  of  Railroads       ......  220 

CHAPTER  XI 

International  Trade 230 

I.     The  Foreign  Trade  of  the  United  States  .         ...  230- 

II.     The  Nature  of  International  Trade   .....  233 

HI.     The  Restriction  of  International  Trade     ....  244 


CONTENTS  vii 


CHAPTER  XII 

VACB 

rHE  Distribution  of  Wealth 259 

I.    The  National  Income  and  its  Distribution         .         .        .  259 

II.     Interest 265 

III.  Wages 275 

IV.  Rent 283 

V.     Profits 295 

CHAPTER  XIII 

The  Labor  Problem 301 

I.    The  Labor  Contract  .         .         .         .         .         .         .        •  301 

II.     Labor  Legislation      .         , 304 

III.  Labor  Organizations           ^ 314 

IV.  The  Relation  of  Laborers  to  the  Product  of  their  Labor  .  335 

CHAPTER   XIV 

E*rojects  for  Economic  Reform 346 

I.    The  Single  Tax 346 

II.     Socialism .  352 

CHAPTER  XV 

Governmental  Revenues 367 

I.    The  Various  Branches  of  Revenue 367 

II.     Federal  Taxation  in  the  United  States       .         .                  .  374 

III.     State  and  Local  Taxation  in  the  United  States  .        .         .  385 

List  of  Works  of  Reference 3S7 

Index o       ^ 4^1 


THE   ELEMENTS  OF  ECONOMICS 


CHAPTER  I 

introduction:  the  science  of  economics 

§  I.  In  the  year  1900  our  twelfth  census  ascertained 
that  29,285,000  persons  were  "engaged  in  gainful  occupa- 
tions" in  the  United  States.  These  workers,  Gainful 
constituting  not  quite  two  fifths  of  the  total  occupations, 
population,  were  employed  in  a  vast  number  of  call- 
ings which  may  be  analyzed  roughly  into  the  following 
classes :  — 

Mines,  forests,  and  fisheries  ......  778,000 

Agriculture 10,305,000 

Manufacturing  and  mechanical  pursuits          .         .         .  6,468,000 

Trade  and  transportation       ......  4,778,000 

Domestic  and  personal  service       .....  5,691,000 

Professional  ser\'ice       .......  1,265.000 

Total 29,285,000 

§  2.   If  now  we  subject  these  statistics  to  a  somewhat 
closer   analysis,    it   will   appear  that   our   farms,    mines, 
forests,  and  fisheries  employed  over  11,000,000    Extractive 
persons,  who  were  engaged  in  producing  the    '"<i"stnes. 
foods,  fibers,  minerals,  and  lumber  required  by  a  nation 
of  76,000,000  people  and  their  numerous  foreign  customers. 

I 


2  THE  SCIENCE  OF  ECONOMICS 

In  the  census  year  1900  the  gross  product  of  all  such  indus- 
tries was  not  far  from  $5,000,000,000.  Of  this  amount 
approximately  one  fifth  was  exported  to  various  coun- 
tries; but  other  raw  materials  and  food  stuffs  were  im- 
ported, the  value  of  which  may  be  placed  at  $550,000,000. 
Such  were  the  basic  processes  upon  which  the  ongoing 
of  American  industry  depended. 

Of  the  6,468,000  persons  engaged  in  working  up  raw 
materials  mto  finished  products,  no  less  than  2,000,000 
Manufactur-  Were  employed  in  the  so-called  hand  trades, 
mfchanicai  Thcsc  hand  workcrs  included  1,200,000  car- 
pursuits,  penters,  masons,  painters,  and  other  workmen 
in  the  building  trades ;  while  the  remainder  were  classified 
as  blacksmiths,  wheelwrights,  shoemakers,  tailors,  seam- 
stresses, and  the  hke.  The  product  of  their  annual  labor 
almost  defies  statistical  measurement,  but  the  very  incom- 
plete figures  of  the  census  show  that  the  hand  trades 
added  some  $700,000,000  to  the  value  of  the  materials 
upon  which  the  workmen  were  engaged.  The  so-called 
manufacturing  industries  employed  some  4,460,000  per- 
sons, and  in  the  census  year  added  some  $4,958,000,000 
to  the  value  of  the  raw  materials  which  they  used.  The 
manufacture  of  iron  and  steel  gave  occupation  to  an  army 
of  680,000  men;  the  cotton,  woolen,  and  other  textile 
industries  required  the  services  of  597,000  operatives; 
317,000  workers  were  occupied  as  bakers,  butchers,  and 
millers,  or  otherwise  engaged  in  the  preparation  of  food; 
about  the  same  number  were  manufacturing  ready-made 
clothes,  hats,  and  furnishing  goods;  some  198,000  factory 
hands  were  making  shoes  or  other  products  of  leather; 
ind    165,000    persons    were    manufacturing    liquors    01 


THE  SCIE!^CE  OF  ECONOMICS  3 

tobacco.  These  details  are  sufficient  to  show  the  extent 
and  character  of  the  secondary  industries  which  work 
over  the  crude  materials  supplied  by  fields,  mines,  or 
forests. 

In  order  that  the  foregoing  industrial  processes  might 
be  carried  on,  it  was  necessary  that  4,778,000  persons 
should  be  employed  in  exchanging  products  Transporta- 
or  in  transporting  persons  and  commodities,  commerce. 
Not  less  than  835,000  people  were  engaged  in  wholesale 
or  retail  trade,  and  they  required  the  assistance  of  714,000 
salesmen.  For  the  work  of  transportation  some  1,346,000 
persons  were  required,  of  whom  582,000  were  railway 
operatives  and  541,000  were  draymen,  hackmen,  and 
teamsters.  In  addition  to  all  these,  some  1,200,000 
clerks,  bookkeepers,  stenographers,  messengers,  porters, 
and  other  workers  found  employment  in  the  field  of  trade 
and  transportation. 

The  workers  so  far  described  were  engaged  in  producing, 
transporting,  or  exchanging  material  commodities;  in 
addition  to  all  such  work,  the  people  of  the 

'       ^  Personal  and 

country  required  the  labor  of  nearly  7,000,000  professional 

,  11.  •  1  service. 

persons  who  rendered  various  services,  domes- 
tic, personal,  and  professional.  Some  2,600,000  persons 
were  classified  as  common  laborers;  1,560,000  were 
employed  as  servants  and  waiters;  380,000  were  engaged 
in  laundry  work,  while  620,000  followed  the  caUings  of 
barbers,  nurses,  housekeepers,  janitors,  hotel  or  restaurant 
keepers,  and  the  like.  Then  approximately  250,000 
people  were  enrolled  in  the  army  and  navy,  or  employed 
as  policemen  or  firemen  in  protecting  life  and  property. 
And    finally    professional   service    claimed    the    labor   of 


4  THE  SC/EIVCE  OF  ECONOMICS 

1,265,000  persons.  Of  these,  446,000  were  teachers, 
112,000  clergymen,  162,000  physicians  or  dentists,  and 
114,000  lawyers;  the  others  were  employed  as  engineers, 
architects,  artists,  actors,  musicians,  and  journaHsts. 
While  these  figures  may  appear  large,  the  whole  body 
of  persons  engaged  in  professional  callings,  and  minister- 
ing to  what  may  be  considered  the  higher  wants  of  the 
country,  was  but  slightly  more  than  four  per  cent  of  our 
entire  industrial  army. 

§  3.   All  of  the  occupations  which  have  been  enumer- 
ated have  this  one  thing  in  common,  that  they  are  modes 
of  activity  by  which  our  people  endeavor  to 

Economic  ■'        ■'  r       r 

activities        procure    a   livelihood.    The   statistics   give   a 

and  the  ,        ,  ,  ...  ,     , 

sconce  of  tolerably  accurate  description  01  the  manner 
in  which  the  effective  labor  force  of  a  nation 
of  76,000,000  people  was  applied  in  various  industries  and 
calhngs  for  the  purpose  of  producing  the  nation's  annual 
subsistence.  Activity  of  this  sort,  whenever  and  wherever 
exerted,  forms  the  subject-matter  with  which  the  science 
of  economics  deals;  hence  we  can  provisionally  define 
economics  as  the  science  which  deals  with  the  efforts  of 
mankind  to  secure  those  material  commodities  and  personal 
services  which  are  needed  to  support  life  and  to  make  a 
civilized  existence  possible. 

§  4.  In  procuring  a  hvehhood  men  sometimes  produce 
for  themselves  the  precise  goods  that  they  require,  as  is 
Household  douc  by  a  farmer  who  draws  from  his  land 
economy.  ^j^^  greater  part  of  the  supplies  needed  for  the 
support  of  his  family.  If  all  production  weie  carried 
on  in  this  manner,  each  family  would  live  in  a  svate  of 
"jconomic  isolation  and  would  have  little  or  no  business 


THE  SCIENCE  OF  ECONOMICS  \ 

intercourse  with  the  rest  of  the  world.  Under  such  con- 
ditions getting  a  living  would  involve  nothing  more  than 
the  prudent  administration  of  a  landed  estate,  and  the 
economist  would  imd  no  object  of  study  except  the  sim- 
ple processes  of  farm  or  plantation  management.  Such, 
indeed,  was  the  scope  of  what  the  Greeks  called  econom 
ics,  which  dealt  with  nothing  more  than  the  adminis 
tration  of  private  estates,^  or  household  economy. 

But,  under  modern  conditions,  production  for  family 
consumption  is  far  less  common  than  the  production 
of  goods  that  are  intended  for  the  market,  social 
Instead  of  working  upon  articles  destined  for  indusufai 
their  personal  use,  most  men  are  engaged  in  society, 
making  things  that  are  to  be  consumed  by  others.  All 
':his  presupposes  the  existence  of  a  complex  social  life  in 
which,  through  countless  acts  of  exchange,  constant  com- 
mercial intercourse  i.^,  maintained  between  producers  and 
■jonsumers.  Producti:)n  thus  becomes  a  social  process  in 
which  the  person  who  cultivates  the  soil  depends  upon 
the  manufacturer,  the  trader,  or  the  professional  man  to 
take  his  product  off  his  hands  and  to  render  in  exchange 
some  useful  commodity  or  service.  Instead  of  living  in 
isolated,  independent  households,  men  are  closely  united 
in  a  wide-reaching  society  in  which  each  person  is  depend- 
ent upon  his  fcHows  for  most  of  the  things  needed  for 
ihe  support  and  ennoblement  of  life.  The  economist, 
therefore,  is  obliged  to  study  the  actions  of  men  who  are 
living  in  an  organized  society;  and  for  this  reason,  eco- 
nomics deals  chieily  with  social  facts  and  relationships. 

1  The  Greek  word  o/xofOM^a  was  derived  from  ofKoj,  estate,  and  ydfxoi, 
biw. 


6  THE  SCIENCE  OF  ECONOMICS 

Sometimes,  indeed,  in  order  to  emphasize  this  truth,  the 
science  has  been  called  social  economics.^ 

§  5.  The  life  which  men  hve  in  society  is  concerned  with 
many  other  things  besides  the  effort  to  procure  a  hveli- 
other  social  hood.  The  range  of  social  activities  includes 
th^sociai'  marriage  and  giving  in  marriage,  the  forma- 
sciences.  ^jon  and  maintenance  of  civil  governments, 
cooperation  in  educational  and  religious  enterprises,  and 
the  organization  of  a  multitude  of  minor  associations 
of  a  serious  or  frivolous  character.  All  these  activities 
may  be  made  the  objects  of  scientific  investigation;  and 
many  of  them  have  been  so  studied,  with  the  result  that 
a  group  of  social  sciences  has  been  developed.  Politics 
is  such  a  science,  dealing  with  the  forms  and  functions 
of  governments.  Jurisprudence  is  another,  and  is  con- 
cerned with  the  legal  rules  of  conduct  which  govern  social 
relations.  History  is  a  social  science  which  investigates 
the  manner  in  which  men  have  Hved  in  the  past,  and 
undertakes  to  recall  the  social  Hfe  of  bygone  ages  —  in 
the  family,  the  church,  the  state,  and  in  industrial  rela- 
tions. Economics,  therefore,  is  but  one  of  a  number 
of  related  sciences  that  treat  of  the  social  experience  of 
the  human  race. 

At  various  times  efforts  have  been  made  to  develop  a 

single,  all-embracing  science  of  society,  known 

as  social  science,^  or  sociology.     It  has  been 

maintained  that  since  economic,  political,  legal,  and  other 

1  The  names  "  political  economy  "  and  "  public  economy,"  which  also 
are  used  —  the  former  much  more  frequently  than  the  latter,  —  mean  the 
same  thing,  viz.  that  the  science  deals  with  the  economy  of  a  larger  social 
group,  and  not  the  economy  of  an  individual  or  a  household. 

2  The  name  "  social  science  "  has  been  applied  often  to  the  investiga* 


THE  SCIENCE  OF  ECONOMICS  f 

forms  of  social  life  constantly  act  and  react  upon  each 
other,  it  is  impossible  to  construct  separate  sciences 
of  economics,  politics,  and  jurisprudence.  But  attempts 
to  study  society  as  a  whole,  in  all  phases  of  its  activity, 
have  not  met  with  much  success,  because  they  disre- 
garded the  simple  fact  that  the  field  of  investigation 
is  so  vast  and  the  facts  to  be  studied  are  so  varied,  that 
some  sort  of  division  of  labor  is  indispensable.  They 
resemble,  indeed,  an  attempt  to  construct  a  single  science 
of  nature,  animate  and  inanimate,  in  place  of  the  separate 
sciences  of  physics,  chemistry,  biology,  geography,  and 
the  like.  ]More  recently,  therefore,  the  scope  of  sociology 
has  been  narrowed,  and  it  has  been  defined  as  "the  science 
of  social  elements  and  first  principles."  The  sciences 
of  economics  and  poHtics  take  man  as  they  find  him, 
existing  in  economic  or  pohtical  relations  with  his  fellows. 
Sociology,  however,  when  treated  as  a  science  of  socia) 
elements,  undertakes  to  explain  the  primary  facts  of  human 
association.  It  studies  the  process  by  which  associations 
of  men  are  formed,  investigates  the  character  of  social 
groups,  and  may  deal  with  the  question  of  social 
progress. 

§  6.   We  have  now  defined  the  field  of  economics  and 
explained  its   relations  to   the   various   social  „ 

_  ^  ^  _  The  divisions 

sciences.     This  book  is  to  deal  with  the  social  of  economic 

science 

activities  and  institutions  that  result  from  men's 

efforts  to  procure  a  livelihood.     Looking  at  these  things 

lion  of  crime,  pauperism,  charities,  and  similar  subjects.  These  topics 
have  not  been  treated  adequately  by  the  other  social  sciences,  and  the  field 
is  sufficiently  extensive  for  a  special  science  of  dependent  and  delinquenl 
classes  of  people.  The  need  of  inconvenient  explanations  would  be 
avoided,  however,  if  some  other  name  than  social  science  were  employed 


8  THE  SCIENCE  OF  ECONOMICS 

from  the  point  of  view  of  the  community,  or  society, 
shall  study  the  means  by  which  nations  become  rich  s 
the  efifect  of  riches  upon  the  pubhc  welfare.  Beginn 
with  an  examination  of  the  needs  that  impel  man  to  p 
duce  useful  commodities,  we  shall  next  investigate 
processes  by  which  production  is  carried  on;  then 
shall  treat  of  the  great  process  of  exchange,  and  finj 
shall  study  the  manner  in  which  the  product  of  indus 
is  divided  among  the  various  classes  of  people  who  h; 
helped  to  create  it.  These  four  main  divisions  of  < 
inquiry  are  usually  termed  the  departments  of  consur 
tion,  production,  exchange,  and  distribution.  In  addit 
to  this,  we  shall  consider  the  ways  and  means  by  wh 
governments  secure  the  money  or  services  upon  wh 
they  depend  for  support, .  and  here  shall  toai  n  upor 
subject  known  as  public  finance. 

This  conception  of  the  scope  of  our  jcience  accords  w 
that  of  the  eminent  economist,  Adam  Smith,  who  pi 
The  scope  of  lished  in  1776  his  famous  ''Inquiry  int3 
the  science.  Nature  and  Causes  of  the  Wealth  of  Nation 
upon  which,  more  than  any  other  work,  subsequent  writ 
have  built.  "Pohtical  economy,"  he  declares,  "propo 
two  distinct  objects:  first,  to  supply  a  plentiful  revenue 
subsistence  for  the  people,  or,  more  properly,  to  ena 
them  to  provide  such  a  revenue  for  themselves;  a 
secondly,  to  supply  the  state  or  commonwealth  witl 
revenue  sufficient  for  the  pubUc  purposes.  It  proposes 
enrich  both  the  people  and  the  sovereign."  Althoi 
riches  are  not  the  sum  and  end  of  human  existence,  a 
the  acquisition  of  wealth  is  not  the  noblest  of  all  activit: 
our  science  will  be  found  neither  mean  nor  sordid.    Rati 


THE  SCIENCE  OF  ECONOMICS  9 

idll  it  appear  that  the  study  of  economics,  while  dealing 
i^ith  matters  of  the  greatest  practical  importance,  tends  to 
[uicken  the  love  of  justice  and  to  encourage  sanity  and 
noderation  of  view  concerning  the  value  of  material 
t^ealth. 

QUESTIONS 

1.  Does  economics  deal  with  the  methods  by  which  an  in- 
lividual  can  become  rich  ? 

2.  What  is  the  importance  of  material  wealth  as  compared 
vith  other  goods  or  ends  which  are  the  objects  of  human  endeavor? 

3.  How  did  the  economic  activities  of  Robinson  Crusoe  com- 
)are  with  those  of  a  man  who  lives  in  a  modern  society  ? 

4.  Why  have  some  writers  asserted  that  it  is  impossible  to 
:onstruct  a  separate  or  independent  science  of  political  economy? 

5.  Would  it  be  possible  to  maintain  with  equal  force  that  it  is 
mpossible  to  develop  a  separate  science  of  physics,  or  chemistry, 
)r  zoology  ? 


CHAPTER  n 

THE  CONSUMPTION  OF   WEALTH 
I.  Human  Needs:  Wealth 

§  7.  The  principal  motive  that  impels  men  to  produce 
useful  commodities  is  the  desire  to  consume  goods  that 
Human  Can  be  procured  only  by  labor.     There  are, 

needs.  ^£  ^.Q^j-gg^  other  motives  for  industrial  effort, 

such  as  a  mere  love  of  activity  or,  among  men  of  great 
v^ealth,  the  ambition  to  dominate  large  business  enter- 
prises; but  vi^ith  the  majority  of  people  it  is  certain  that 
the  necessity  of  procuring  consumable  goods  is  the  main- 
spring of  economic  activity.  For  this  reason  we  shall 
make  human  needs  and  the  consumption  of  wealth  the 
starting  point  of  our  inquiry. 

Economics  is  not  concerned  with  all  the  possible  needs 
of  man's  nature,  but  investigates  only  those  which  impel 
Existence       him  to  sccurc  a  livelihood.     Of  such   needs 

and  culture 

wants.  the  earliest  and  most  persistent  are  the  desires 

for  food,  shelter,  and  clothing,  which  we  may  call  man's 
existence  wants.  With  the  growth  of  intelligence  and 
refinement,  a  multitude  of  new  desires  is  aroused,  and 
what  may  be  called  culture  wants  are  gradually  developed. 
These  new  wants  are  directed  toward  things  that  tend 
to  the  enrichment  or  ennoblement  of  human  hfe,  such  as 
material  comforts  and  luxuries  or  education,  art,  and  traveL 


HUMAN  NEEDS:    WEALTH  II 

§  8.  In  an  examination  of  economic  needs  we  should 
consider  the  law  o]  the  increase  and  diversification  of  human 
wants.  The  lowest  tribes  of  savages  are  appar-  The  increase 
ently  satisfied  if  thev  can  provide  themselves  cauon'o"^^^ 
with  a  few  simple  kinds  of  food  and  such  ^^nts. 
shelter  or  clothing  as  the  chmate  renders  imperatively 
necessary;  and  they  begin  to  progress  in  civilization  when 
the  ^development  of  their  faculties  or  the  awakening  of 
new  desires  leads  them  out  of  the  circle  of  their  original 
animal  needs.  In  fact  the  progress  of  our  race  from 
barbarism  to  civihzation  can  be  described  not  inaccurately 
as  a  process  of  increase  and  diversification  of  human 
wants.  When  an  abundance  of  the  simplest  food  is  once 
assured,  men  begin  to  improve  the  methods  of  preparing 
it  and  to  search  for  new  edibles  with  which  to  vary  their 
diet.  The  same  thing  occurs  with  man's  shelter  and 
clothing,  so  that,  in  the  course  of  time,  fine  houses  and 
elaborate  dress  become  favorite  means  of  indulging  artistic 
tastes  or  making  an  ostentatious  display  of  wealth.  With 
man's  higher  wants  the  possibility  of  increase  and  diversi- 
fication is  indefinitely  great,  especially  since  the  pursuit 
of  such  things  as  art  or  science  comes  to  have  for  its  object 
the  development  of  one's  faculties  rather  than  the  satis- 
faction of  the  senses.  Under  such  conditions,  although 
the  complete  satisfaction  of  some  of  the  lower  bodily 
needs  is  possible,  we  can  discover  no  limit  to  the  growth 
and  diversification  of  our  other  wants. 

§  9.    Everything  that  has  the  power  to  satisfy  a  human 
want  is  said  to  possess  utility ;  and  to  such  things   utilities 
the  economist  apphes  the  names  "utilities"  or  *°*k<x>^*- 
"goods."    But  there  are  goods  that  do  not  come  within 


12  THE  CONSUMPTION  OF  WEALTH 

the  range  of  economic  investigation,  which  deals  only  with 
the  subject  of  procuring  a  liveUhood.  Health,  friendship, 
knowledge,  and  moral  worth  are  among  the  supremest 
goods ;  but  they  fall  primarily  to  the  province  of  the  phy- 
sician, the  teacher,  or  the  moralist  —  not  to  the  economist, 
who  has  occasion  to  consider  them  only  in  so  far  as  they 
bear  upon  the  main  subject  of  his  inquiries,  the  produc- 
tion and  use  of  the  things  that  constitute  a  livelihood. 
Material  commodities  and  personal  services  are  the  ob- 
jects of  all  economic  activity,  and  it  is  of  these  utilities 
that  economics  treats. 

The  utihty,  or  want-satisfying  power,  of  commodities 
may  arise  in  any  one  of  four  ways.  An  object  may  be 
The  four         fitted,  as,  for  example,  iron  ore,  to  serve  as  raw 

kinds  of  '.  ^     '  ' 

utility.  material   for  some  manufactured   article;    in 

which  case  it  is  said  to  have  elementary  utihty.  Next, 
after  undergoing  changes  in  form,  the  iron  may  be  con- 
verted into  a  finished  product  ready  for  man's  use,  and 
will  then  possess  ]orm  utility.  Again,  when  transported 
from  the  rolling  mill  or  machine  shop  to  the  place  where 
it  is  desired  by  the  consumer,  the  product  acquires  place 
utihty ;  and  herein  consists  the  whole  service  which  trans- 
portation agencies  render  to  society.  Finally,  many  com- 
modities vary  in  usefulness  from  one  season  of  the  year 
to  another,  as  is  the  case  with  ice  and  fuel.  A  person  who 
stores  up  ice  in  the  winter  and  distributes  it  to  his  customers 
the  following  summer  creates  time  utility,  which  is  just  as 
important  a  factor  in  determining  the  serviceableness  of 
many  things  as  are  utihties  of  form  and  place. 

§  lo.  To  the  services  and  commodities  that  are  the 
objects  of  all  industrial  effort,  the  economist  applies  the 


THE  LAWS  OF  CONSUMPTION-  \% 

name  "wealth."  Economics,  in  fact,  has  frequently  been 
defined  as  "that  science  which  relates  to  wealth."  In 
common  usage  this  term  often   means   great 

•   1  ,  1     •  1  .  1  •   1       ,        Wealth. 

nches,  but  such  is  not  the  sense  m  which  the 
economist  employs  it.  To  him  the  poor  man's  dwelling 
and  the  rich  man's  palace  are  alike  wealth,  since  they  satisfy 
economic  wants.  Wealth  has  been  defined  also  as  any- 
thing that  has  the  power  of  commanding  other  things  in 
exchange  —  a  definition  that  is  accurate  enough  for  most 
practical  purposes,  since  nothing  can  be  exchangeable  if 
it  does  not  satisfy  some  human  desire.  But  there  are  a 
few  economic  goods,  such  as  heirlooms,  which,  having 
utility  for  no  one  except  the  owner,  could  not  be  exchanged 
for  anything  else,  and  yet  deserve  to  be  included  within  the 
category  of  wealth.  For  this  reason  preference  should  be 
given  to  our  first  definition.  A  generation  ago  wealth  was 
usually  defined  so  as  to  include  nothing  but  material 
commodities,  and  services  were  excluded  from  the  scope 
of  economic  investigation ;  but  such  an  arbitrary  omission 
of  things  that  form  the  object  of  countless  business  trans- 
actions could  not  be  justified,  and  has  been  abandoned 
by  most  writers.  Material  goods,  whether  exchangeable 
or  not,  and  all  personal  services  by  which  men  secure  a 
livelihood,  are  the  constituent  parts  of  wealth. 

II.  The  Laws  of  Consumption 

§  II.   By  the  consumption  of  wealth  is  meant  the  de- 
struction  oj  utilities.     It  may  have  any  one  of  three  forms. 
When  utilities  are  destroyed  by  a  person  who  consumption 
derives  from   them   the  satisfaction   that  they  ^^^°«<^- 
were  intended  to  afford,  we  have  an  act  of  final  consump- 


14  THE  CONSUMPTION  OF  WEALTH 

tion.  When,  on  the  other  hand,  commodities  are  used  as 
tools  or  raw  materials  in  the  manufacture  of  finished 
products,  productive  consumption  occurs;  for,  although 
the  utility  of  such  goods  is  destroyed,  it  reappears  in  the 
value  of  the  completed  product.  Finally,  if  utilities  are 
destroyed  without  affording  satisfaction  to  any  consumer 
or  aiding  in  the  production  of  other  goods,  we  have  an 
example  of  waste. 

§  12.  Although  there  is  no  assignable  limit  to  the  in- 
crease and  diversification  of  human  desires,  any  particular 
Human  want  is  Satiable.     If  a  person  consumes  at  any 

wants  are  .  .  .        ^      _  _  ^ 

satiable.  given  time  successive  units  or  portions  of  a 
commodity,  he  finds  that  the  later  units  give  less  pleasure 
or  satisfaction  than  the  first.  A  small  quantity  of  bread 
may  appease  the  pangs  of  severe  hunger,  an  additional 
amount  may  meet  the  needs  of  a  healthy  appetite,  while 
a  further  supply  will  be  eaten  with  indifference,  if  at  all. 
If  enough  bread  or  enough  of  most  other  things  is  con- 
sumed, a  point  of  satiety  will  finally  be  reached,  at  which 
an  additional  quantity  will  yield  no  satisfaction  whatever, 
and  may  even  cause  pain. 

A  consideration  of  these  facts  enables  us  to  formulate 

the  most  important  principle  governing  the  consumption 

^  .        of  wealth  —  the  law  of  the  variation  of  utihty. 

Law  of  the  _  _  ^  ■' 

vanationot  It  is  evident  that  the  different  units  of  the 
stock  of  any  commodity  do  not  have  the  same 
power  of  satisfying  human  wants,  and  that  their  utility 
constantly  decreases  as  the  supply  is  enlarged.  A  few  units 
of  an  article  necessary  for  the  support  of  Hfe  will  have  a 
utility  that  is  indefinitely  great ;  while  additional  units,  use- 
ful as  they  may  be,  will  satisfy  wants  of  steadily  diminish- 


THE  LAWS  OF  CONSUMPTION-  15 

ing  intensity.     Upon  this  law  depend  some  of  the  most 
important  theorems  of  the  science  of  economics. 

We  are  now  in  a  position  to  make  a  distinj:tion  between 
total  and  marginal  utility.  Until  the  point  of  satiety  is 
reached,  each  unit  of  the  stock  has  a  certain  Total  and 

marginal 

power  of  satisfying  wants,  which  will  probably  utility, 
vary,  however  slightly,  from  the  utihty  of  each  of  the  other 
units.  One  of  the  units  must  satisfy  a  want  which  is  less 
intense  than  that  met  by  any  of  the  others,  and  this  may 
be  called  the  marginal  unit;  while  its  utiHty  may  be 
called  the  marginal  utility  of  the  entire  stock.  Marginal 
utility,  therefore,  is  defined  as  the  utility  0}  the  last,^  or  least 
important,  unit  0}  the  supply  0}  a  commodity;  other  things 
being  equal,  the  greater  the  supply,  the  lower  the  marginal 
utility  will  fall.  On  the  other  hand,  total  utility  is  the  aggre- 
gate want- satisfying  power  of  all  the  units  of  the  entire  stock. 
Little  reflection  is  needed  to  show  that  our  estimate  of 
the  relative  importance  of  commodities  for  our  use  depends 
upon  the  marginal,  and  not  upon  the  total  utility.  The 
A  farmer  who  has  harvested  1000  bushels  of  o™rgoor* 
Indian  com  consumes  a  part  of  the  crop  for  ft^ma^gmal" 
food,  reserves  a  portion  as  seed  for  the  next  year,  "t>"ty- 
feeds  a  considerable  amount  to  cattle  or  poultry,  and  sends 
the  remainder  to  a  distillery,  where  it  is  converted  into 
whiskey.  Assuming  that  he  is  not  inordinately  fond  of 
strong  drink,  it  is  probable  that  the  least  important  portion 
of  the  entire  crop  is  that  which  is  destined  for  the  distillery ; 

'  Last,  that  is,  in  point  of  importance.  The  most  important  use  of  salt 
may  he  its  use  on  the  lahle  ;  the  next,  its  use  in  fccdinj^  cattle  ;  the  last. 
Its  use  in  keeping  weeds  out  of  sidewalks.  The  utility  of  salt  for  thb  last 
purpose  is  its  marginal  utility. 


l6  THE  CONSUMPTION-  OF  WEALTH 

and  so  long  as  the  annual  crop  is  as  large  as  looo  bushels, 
any  single  bushel  is  of  no  more  importance  to  the  farmer 
than  the  whiskey  which  can  be  distilled  from  it.  If  the 
crop  of  the  next  year  is  deficient,  no  corn  may  be  sent  to 
the  distillery;  and  the  marginal  utihty  of  the  stock  may 
rise  to  that  of  the  cattle  or  poultry  maintained  by  means 
of  what  is  now  the  least  important  portion  of  it.  If,  on 
the  other  hand,  an  unprecedented  harvest  snould  yield  a 
crop  of  2000  bushels,  the  farmer  might  use  some  of  the 
corn  for  fuel,  —  a  thing  that  has  repeatedly  occurred  in 
the  West  when  there  has  been  a  glut  in  the  corn  market. 
In  all  cases  it  is  the  use  made  of  the  marginal  unit  that 
determines  the  importance  of  any  unit  of  the  supply. 

§  13.  From  the  law  of  the  variation  of  utility  and  the 
proposition  that  the  importance  of  a  commodity  depends  on 
The  its  marginal  utility,  we  can  proceed  to  another 

order°^/°  important  principle,  —  the  law  governing  the 
consumption,  economic  Order  of  consumption.  In  selecting 
goods  for  our  consumption,  we  estimate  first  of  all  the  mar- 
ginal utility  of  the  various  commodities  between  which  we 
are  to  choose.  The  fact  that  bread  or  meal  is  necessary  to 
support  life,  and  therefore  possesses  infinite  total  utihty, 
does  not  lead  us  to  purchase  an  indefinite  supply  of  such 
necessaries  of  existence.  We  compare  the  utility  of  the 
least  important,  or  marginal,  unit  of  meat  or  bread  with 
the  marginal  utility  of  other  commodities,  and  select  the 
article  which  yields  the  highest  marginal  utihty.  For  a 
hungry  man  who  has  nothing  to  eat,  bread  or  meat  will 
have  a  greater  marginal  utility  than  anything  else ;  but  a 
man  whose  bodily  wants  are  well  supplied  will  prefer  to 
purchase   fine   clothes,   or  books,   or  articles   of  luxury 


THE  LAWS  OF  CONSUMPTION  \j 

These  things  have  a  smaller  total  utility  than  the  food 
which  keeps  him  alive,  but  to  a  well-fed  man  they  have 
greater  marginal  utiHty.^ 

But  the  marginal  utiHty  of  commodities  is  not  the  only 
thing  that  a  prospective  purchaser  will  take  into  account. 
A  diamond  mav  have  greater  marginal  utility  Marginal 

°     .  °  ^     utility  and 

for  me  than  any  other  precious  stone,  but  before  cost, 
purchasing  it  I  must  consider  carefully  the  cost.  If  my 
daily  wages  are  but  $2,  I  may  never  in  my  life  buy  a  dia- 
mond, because  its  cost  is  so  great  that  I  would  prefer  some 
less  expensive  stone.  Evidently  a  purchaser  compares 
not  only  the  marginal  utility  of  one  commodity  with  that 
of  another,  but  he  also  compares  their  respective  costs: 
in  forming  a  decision,  he  will  determine  which  article  will 
yield  him  the  greatest  surplus  of  marginal  utihty  above 
its  cost.  If,  for  instance,  oranges  and  bananas  arc  offered 
for  sale  at  the  same  price,  say  twenty  cents  a  dozen,  a  per- 
son who  prefers  bananas  to  oranges  will  certainly  purchase 
bananas,  since,  the  cost  being  the  same,  they  will  evidently 
yield  him  the  greater  surplus  of  utiHty.  Having  pur- 
chased a  dozen  bananas,  however,  and  having  thereby 
lowered  their  marginal  utility,  it  is  possible  that,  if  he 
makes  a  second  purchase  immediately,  half  a  dozen 
oranges  may  be  selected.     To  vary  the  illustration,  let  us 

'  Early  econf)mists,  who  were  not  familiar  with  the  distinction  between 
total  and  marginal  utility,  were  puzzled  by  the  fact  that,  as  Adam  Smith 
put  it,  "The  thitifjs  which  have  the  greatest  value  in  use  have  frequently 
little  or  no  value  in  exchange."  Smith  observed  :  "  Nothing  is  more  useful 
than  water  ;  but  it  will  purchase  scarce  anything.  ...  A  diamond,  on 
the  contrary,  has  scarce  any  value  in  use,  but  a  great  fjuantity  of  goods 
may  frequently  be  had  in  exchange  f(jr  it."  How  would  a  modern  econo- 
oiiit  explain  this  apparent  paradox  ? 


1 8  THE  CONSUMPTION-  OF  WEALTH 

assume  that  a  banana  costs  five  cents  while  oranges  are 
selling  for  a  cent  apiece.  Under  such  conditions  a  sHght 
preference  for  bananas,  which  implies  that  the  marginal 
utility  of  this  fruit  is  slightly  greater,  would  not  be  enough 
to  lead  a  purchaser  to  select  bananas.  Before  he  will  buy 
the  more  expensive  fruit  his  preference  must  be  strong 
enough  to  overcome  a  difference  of  four  cents  in  the  cost ; 
and  unless  bananas  have  for  him  a  very  much  greater 
marginal  utility,  he  will  derive  the  greater  surplus  of  satis- 
faction over  cost  by  purchasing  oranges.  The  economic 
order  of  consumption,  therefore,  depends  on  the  marginal 
utility  and  the  cost  of  commodities;  and  those  articles  will 
be  selected  which  yield  the  greatest  surplus  of  marginal 
utility  above  their  cost.^ 

§  14.  Since  considerations  of  this  sort  determine  the 
choices  which  purchasers  make  in  all  markets,  we  may 
The  law  base  upon  the  principles  governing  the  eco- 
of  demand.  nomic  Order  of  consumption  a  general  law  of 
demand.  By  demand  the  economist  means  something 
more  than  simple  desire;  he  means  desire  coupled  with 
the  abihty  to  pay.  Demand  is  said  to  be  small  when  the 
amount  of  a  commodity  that  the  pubHc  will  buy  is  small, 
and  large  when  the  quantity  purchased  happens  to  be 
large.  At  any  given  time  it  will  vary  according  to  the 
marginal  utility  of  a  commodity  and  the  cost  of  obtaining 
it,  i.e.,  the  price  at  which  it  is  offered.     If  the  marginal 

^  Under  modern  conditions  the  purchaser  makes  all  the  estimates  in 
terms  of  money.  To  him  money  represents  general  purchasing  power,  and 
any  amount  of  money,  as  one  dollar,  represents  a  certain  fractional  part 
of  his  income.  The  purchaser  knows  what  a  dollar  is  worth  to  him,  and 
he  compares  the  marginal  utility  of  any  commodity  with  the  marginal 
utility  of  the  money  required  to  purchase  it. 


THE  LAWS  OF  CONSUMPTION  19 

Utility  is  high,  consumers  will  obtain  a  larger  surplus  of 
satisfaction,  and  the  demand  will  be  large ;  if  the  marginal 
utility  declines,  on  account  of  changes  in  taste  or  fashion^ 
the  demand  inevitably  falls.  If  the  cost  of  a  commodity 
is  great,  consumers  will  derive  a  smaller  surplus  of  satis- 
faction from  its  use,  and  the  demand  will  be  light;  if, 
however,  the  price  is  reduced,  the  surplus  increases  and 
the  demand  improves.  Demand  varies  directly  ivith  the 
marginal  utility  of  a  commodity,  and  inversely  with  the 
price  at  which  it  is  offered. 

It  remains  for  us  to  consider  certain  pecuHarities  in  the 
demand  for  different  commodities.  With  some  articles 
the  demand  is  very  sensitive  to  changes  in  Elasticity 
price,  decreasing  promptly  when  prices  rise  "^  demand, 
and  quickly  increasing  as  they  fall.  Such  a  demand  is 
termed  elastic,  and  has  the  effect  of  steadying  the  price 
of  a  commodity  at  times  when  the  supply  fluctuates.  This 
is  the  case  with  most  of  the  comforts  and  luxuries  of  life 
purchased  by  the  middle  classes  of  our  people.  If  a 
shortage  develops  in  the  supply  of  such  articles,  a  moder- 
ate rise  in  the  price  will  reduce  materially  the  demand  and 
prevent  a  great  disturbance  of  the  market ;  while  a  largely 
increased  supply  will  be  disposed  of  readily  enough  if 
prices  are  slightly  reduced.  But  with  the  great  staple 
articles  consumed  by  the  masses  of  the  people,  the  demand 
is  inelastic.  Prices  of  wheat,  cotton,  sugar,  and  salt  fluc- 
tuate very  greatly  whenever  the  supply  is  suddenly  in- 
creased or  decreased,  since  a  slight  reduction  in  price  will 
not  stimulate  sales  enough  to  carry  a  surplus  out  of  the 
market,  and  a  moderate  increase  will  not  reduce  mate- 
dally  the  amount  that  the  j)cople  demand. 


20  THE  COJVSC/MPT/OAr  OF  WEALTH 

Elasticity  of  demand  implies  that  a  commodity  may  be 
dispensed  with,  and  brings  it  about  that,  when  such  a 
Elasticity  misfortune  as  a  commercial  crisis  reduces  the 
furthef  "^  purchasing  power  of  the  people,  the  demand 
considered.  fQj.  articles  of  this  character  will  fall  off  very 
rapidly.  Almost  no  class  of  commodities  can  escape  alto- 
gether the  effects  of  a  period  of  industrial  depression,  but 
it  is  always  the  less  necessary  articles,  i.e.,  those  for  which 
the  demand  is  elastic,  which  are  first  and  most  seriously 
affected.  Elasticity  of  demand,  therefore,  produces  sta- 
bility of  prices  when  the  supply  fluctuates,  and  instabihty 
when  the  purchasing  power  of  the  people  is  reduced. 

For  any  brief  period  of  time  demand  may  be  said  to 
depend  simply  upon  the  marginal  utility  of  a  commodity 
Changes  in  and  the  price  at  which  it  is  offered,  but  over 
power^of^^  longer  periods  this  statement  is  not  entirely 
consumers.  adequate.  From  year  to  year  changes  may 
take  place  in  the  resources  or  purchasing  power  of  the 
consumers,  and  such  changes  are  a  third  factor  in  deter- 
mining demand.  Obviously,  an  increase  of  resources 
reduces  the  importance  of  a  dollar  to  the  consumer  and 
affects  demand  in  the  same  manner  as  a  reduction  of 
price.  It  frequently  happens,  therefore,  that  the  demand 
is  greater  in  years  of  high  prices  than  in  years  of  low  prices 
caused  by  industrial  depression.  From  1894  to  1896,  for 
instance,  before  business  had  recovered  from  the  panic 
of  1893,  the  average  annual  price  of  wheat  in  New  York 
City  ranged  from  sixty-one  to  seventy-eight  cents,  and  the 
annual  consumption  of  the  country  averaged  296,600,000 
bushels.  After  that,  however,  times  began  to  improve, 
with   the   result   that,    although   the   price   ranged   from 


STATISTICS  OF  CONSUMPTION 


21 


seventy-nine  to  ninety-five  cents,  the  annual  consumption 
of  wheat  averaged  349,400,000  bushels  from  1897  to  1899. 
We  conclude,  then,  that  it  is  only  for  short  periods,  within 
which  the  resources  of  the  consumers  remain  virtually 
unchanged,  that  demand  will  depend  solely  upon  the  mar- 
ginal utility  of  a  commodity  and  upon  its  price. 

III.   Statistics  of  Consumption 

§  15.  Some  of  the  laws  governing  the  consumption  of 
wealth  find  interesting  confirmation  and  illustration  in 
statistics  of  family  expenditures  which  have  statistics  of 
been  gathered  by  various  investigators.  The  co°s'^p«o°- 
most  celebrated  of  these  studies  was  made  by  a  German 
statistician,  Dr.  Engel,  and  related  to  the  consumption  of 
the  working  classes  of  Saxony.  Its  results  are  shown  in 
the  following  table:  — 


Items  of  Expenditurk 


Percentage  of  the  Expenditure  of 
THE  Family  of 


A  man  with 
an  income  of 
from  $225  to 
$300  a  year 


Subsistence 

Clothing 

Lodging 

Firing  and  lighting     .... 
Education,  public  worship,  etc. 

Legal  protection 

Care  of  health 

Comfort,    mental    and     bodily 
recreation 


Per  cent 

62.0 

16.0  I 

95.0 
12.0      ^^ 

I 
5.0 

2.0  1 

I.O 

I.O 


A  man  with 
an  income  of 
from  $450  to 

$600  a  year 


5.0 


I.O 


Total 


Per  cent 

55-0  I 
18.0  , 
12.0  I  ^ 
5.01 

3  5] 

2.0  I 
I 
2.0     100 

2.5  J 


A  man  with 
an  income  of 
from  $750  to 
$1000  a  year 


850 


Per  cent 

50.01 

18.0 

12.0 

5.0  J 

5-5] 
3-0  I 
30  i  150 

I 
3-5' 

lOO.O 


22 


THE  CONSUMPTION  OF  WEALTH 


From  these  figures  it  appears  that,  (i)  as  the  income 
of  a  family  increased,  a  smaller  percentage  was  expended 
Engers  for  food;    (2)  with  every  increase  of  income, 

^^^-  .  the    proportionate    expenditure    for    clothing 

remained  approximately  the  same;  (3)  with  all  changes 
in  income,  the  percentage  spent  for  rent,  fuel,  and  light 
remained  invariably  the  same ;  and  (4)  as  fast  as  incomes 
increased,  a  larger  proportion  was  devoted  to  education, 
recreation,  and  miscellaneous  purposes.  These  conclu- 
sions are  generally  known  as  Engel's  law. 

Subsequent  investigations  in  the  United  States  as  well 
as  Europe  have  shown  the  substantial  accuracy  of  Engel's 
American  results.  The  Seventh  Annual  Report  of  the 
data.  United  States  Commissioner  of  Labor  supplies 

us  with  the  following  data :  — 


Object  of 
Expenditure 

Income 
under 
$200 

Income 

$300  and 

under 

$400 

Income 

$500  and 

under 

$600 

Income 

$700  and 

under 

$800 

Income 

$900  and 

under 

$1000 

Income 

$1200 

and  over 

Percent 

Percent 

Percent 

Percent 

Percent 

Per  cent 

Rent 

15.48 

14.98 

15.15 

15.60 

14.96 

12.59 

Fuel 

7.07 

6.04 

563 

4.42 

4.00 

2.57 

Lighting  .... 

I.OI 

.98 

•97 

.88 

•74 

■45 

Clothing  .... 

12.82 

14.14 

15.27 

16.33 

16.84 

15.71 

Food 

49.64 

45-59 

43-84 

38.89 

34-34 

28.63 

All  other  purposes 

13.98 

18.27 

19.14 

23.88 

29.12 

40.05 

From  all  of  these  figures  it  appears  that  about  nine 
tenths  of  the  income  of  very  poor  families  is  expended 
Significance     ^^^  ^^^  Satisfaction  of  mere  existence  wants, 

of  these  and  that  about  one  half  is  devoted  to  the  pur- 

figures.  ^ 

chase  of  food.    As  incomes  increase,  a  larger 

proportion  can  be  expended  in  satisfying  culture  wants, 


SJAJ/SJ/CS  OF  CONSUMPTION  23 

or  can  be  saved.  It  is  clear  that  the  desires  for  food, 
clothing,  and  shelter  are  less  expansive  than  the  othei 
needs  that  constantly  claim  an  increasing  proportion  ol 
the  larger  incomes.  Clearly,  also,  the  desire  for  bettei 
clothes  and  shelter  is  more  expansive  than  the  desire  foi 
improved  diet,  since  the  former  claims  a  fairly  constant 
proportion  of  all  incomes,  while  the  latter  is  satisfied  with 
a  steadily  diminishing  percentage.  In  general,  it  is  appar- 
ent that,  as  the  means  of  a  family  increase,  a  larger  surplus 
of  utility  can  be  secured  by  diversifying  the  objects  of 
family  consumption. 

§  16.    Besides  illustrating  the  laws  of  the  consumption 
of  wealth,   statistics  of  consumption   furnish  convenient 
data    for    testing    economic    prosperity.*      As 
Dr.  Engel  suggested,  the  percentage  of  income  economic 
expended  for  subsistence  can  be  taken  as  an 
index  of  the  material  prosperity  of  a  family,  and  we  can 
consider  a  small   relative  outlay  for  food  an  indication 
of  greater  welfare.     But  in  addition  to  this  we  can  esti- 
mate  the   compai'ative   well-being  of   different   countries 
by  the  aid  of  statistics  that  show  the  per  capita  consump- 
tion of  various  commodities. 

The  relative  outlay  for  meat  increases  with  the  income 
of  the  average  family,  and  this  faci:  lends  considerable 
interest  to  the  statistics  showing  the  per  capita  consumption 
consumption    of   this   important   article.     For  °*™6*'- 
England  and  France  the  following  data  are  available :  — 

'  Dr.  Engel  "has  advanced  the  theory  that  it  might  be  possible  by  a 
careful  study  of  a  sufficient  number  of  family  budgets  for  a  period  of  yearJ 
to  construct  a  sort  of  social  signal  service.  His  idea  is  that  changes  in  tota) 
expenditures  an'l  in  expenditures  for  various  items  in  a  sufficient  number  ol 
typ<<^  families  would  enable  us  to  predict  the  coming  of  industrial  storinA.' 


24 


THE   CONSUMPTION  OF   WEALTH 


Per  Capita  Meat  Consumption  in  Kilograms 

(Kilogram  =  2.2  lb.) 


Years 

France 

England 

1812 

1840 

1862 

1868 

1882 

1890 

17 
20 
26 

33 

100.5 

124.5 

The  figures  show  a  considerable  increase  in  the  consump- 
tion of  meat,  which  may  be  accepted  as  an  indication  of 
greater  well-being  during  the  last  half  of  the  nineteenth 
century.  They  reveal  also  a  marked  difference  in  the 
amounts  of  meat  eaten  in  the  two  countries.  This  indi- 
cates in  part  a  higher  standard  of  Hving  in  England ;  but 
it  is  probable  that,  under  conditions  of  equal  well-being, 
the  consumption  of  meat  would  be  somewhat  smaller  in 
France  than  on  the  English  side  of  the  Channel. 

Of  greater  interest  are  the  statistics  of  the  consump- 
tion of  various  cereals  in  the  leading  countries  of  Europe, 
Consumption  ^ince  the  grains  are  much  more  important  than 
of  cereals.  j^g^t  ^s  articles  of  diet.  At  a  comparatively 
recent  date  (1890)  the  showing  was  as  follows:  — 

Per  Capita  Grain  Consumption  in  Kilograms 


Wheat 

Rye 

Barley 

Maize 

Oats 

England  .... 

154 

82 

15 

102 

France      .... 

256 

46 

32 

25 

95 

Germany.     .     .     . 

67 

138 

56 

5 

88 

Russia      .... 

82 

242 

37 

117 

STATISTICS  OF  CONSUMPTION-  25 

The  most  striking  fact  disclosed  by  this  table  is  the 
large  consumption  of  wheat  in  England  and  France  and 
the  enormous  consumption  of  rye  in  Germany  and  Russia. 
This  is  due  to  the  fact  that  the  peasants  and  the  town 
laborers  of  the  latter  countries  cannot  afford  to  buy  white 
bread,  and  perforce  subsist  on  rye.  In  the  consumption 
of  barley,  maize,  and  oats  the  differences  are  compara- 
tively unimportant.  Between  England  and  France  a 
marked  difference  appears  in  the  amount  of  wheat  and 
rye  consumed,  a  difference  which  is  probably  explained 
by  the  larger  consumption  of  meat  in  England.  If  statis- 
tics were  to  be  prepared  upon  the  same  basis  for  the 
United  States,  they  would  show  a  generous  consump- 
tion of  wheat,  a  large  consumption  of  maize,  —  which,  it 
will  be  observed,  is  Httle  used  in  Europe,  —  a  considerable 
consumption  of  oats,  and  a  small  consumption  of  rye 
and  barley. 

If  a  large  use  of  rye  bread  indicates  a  lower  plane  of 
inaterial  welfare,  this  is  still  more  the  case  with  a  large 
consumption   of  potatoes.     For  the   countries  consumption 
of  chief  interest  the  figures  for  1890  stand  as  »*  potatoes, 
follows :  — 

Per  Capita  Consumption  of  Potatoes  in  Kilograms 


Ireland 
Germany 


679 
500 


France 
England 


292 
93 


Thus  the  large  consumption  of  potatoes  in  Ireland  indi- 
cates, not  prosperity,  but  poverty;  and  the  same  is  true 
of  the  figures  for  Germany.  With  England  and  France 
something  better  than  a  potato  diet  is  shown,  the  former 


26 


THE  CONSUMPTION  OF  WEALTH 


country  holding  a  considerably  better  position  than  the 
latter.  In  all  particulars  these  statistics  reenforce  the 
conclusions  drawn  from  those  relating  to  the  consump- 
tion of  grain  and  meat. 

In  modem  times  the  use  of  sugar  has  been  greatly 
extended,  and  this  commodity  is  now  an  important  article 
Consumption  ^^  the  Consumption  of  the  masses  of  the  people, 
of  sugar.  Since  1850  the  estimated  sugar  production 
of  the  world  has  risen  from  1,463,000  to  9,475,000  long 
tons,  an  increase  that  far  exceeds  the  growth  of  popula- 
tion. But  this  larger  consumption  of  sugar  has  been 
very  unevenly  distributed  among  the  various  countries 
that  have  participated  in  it.  In  France  and  Germany 
the  price  has  been  kept  high  by  taxation,  while  a  vicious 
system  of  export  bounties  brought  it  about  that  French 
and  German  beet  sugar  was  sold  in  England  for  less  than 
cost.  Under  such  conditions  no  surprise  will  be  caused 
by  the  following  figures :  — 

Per  Capita  Consumption  of  Sugar  in  Kilograms 


Annual  Average 
1870-1874 

Annual  Average 
1885-1889 

Great  Britain  and  Ireland  . 

United  States 

France 

Germany 

Italy 

22.6 

i;.6 

7-8 

6.7 
2.9 

32.6 

24.5 

10.7 

7.8 

3-1 

In  recent  years  (i  889-1 899)  the  Enghsh  consumption  has 
risen  to  43  kilograms,  the  American  to  32,  the  French  to 
t5,  and  the  German  to  13.7.     Of  course,  even  if  there 


STATISTICS  OF  CONSUMPTION  27 

had  been  no  sugar  taxes  and  export  bounties  in  France 
and  Germany,  the  English,  with  their  higher  standard 
of  comfort,  would  probably  have  consumed  more  sugar 
than  the  French  or  Germans;  but,  as  things  have  been, 
the  difference  in  favor  of  England  has  been  enormously 
accentuated. 

The  increased  consumption  of  meat  and  sugar  in  m.ost 
of  the  countries  included  in  our  investigations  leads  one 
to  the  conclusion  that  there  has  been  a  material 

Conclusions. 

improvement  m  the  diet  of  large  numbers 
of  people,  even  though  all  classes  may  not  have  partici- 
pated equally  in  the  greater  diffusion  of  comfort.^  The 
same  inference  can  be  drawn  from  the  fact  that,  in  some 
countries,  at  least,  the  consumption  of  tea  and  coffee 
has  advanced  with  considerable  rapidity.  In  the  United 
States  this  change  has  been  very  marked.  Our  consump- 
tion of  tea  per  capita  increased  from  about  one  half  pound 
in  1830  to  something  over  one  pound  in  the  year  1900, 
while  the  coffee  consumed  by  our  people  rose  from  less 
than  three  pounds  to  nearly  ten  pounds  during  the  same 
period.  The  greatest  differences  appear  in  the  relative 
amounts  of  these  two  articles  consumed  by  various  coun- 
tries. Australia,  Great  Britain,  and  Canada  use  very 
large  quantities  of  tea,  and  consume  comparatively  little 
coffee.  At  the  opposite  end  of  the  scale,  Germany,  France, 
and  Belgium  use  a  large  amount  of  coffee  and  very  little 
tea;  while  the  United  States  and  Holland  consume  a 
moderate  quantity  of  tea  and  a  large  amount  of  coffee. 
It  would  be  possible  to  show  similar  peculiarities  in  the 

*  If  it  were  possible  to  obtain  statistics  showing  the  increased  consunip- 
tion  if  fruits  and  vegetables,  this  conclusion  would  be  strikingly  reSnforccd 


28  THE  CONSUMPTWN  OF  WEALTH 

consumption  of  liquors  and  tobacco;  but  limitations  of 
space  compel  us  to  proceed  to  another  division  of  our 
subject,  —  the  production  of  wealth. 

FOR   SUPPLEMENTARY   STUDY 

General:  Hadley,  Economics,  1-25;  Marshall,  Economics,  118- 
131,  158-198;  Seager,  Introduction  to  Economics,  63-80. 

Special:  Mayo-Smith,  Statistics  and  Economics,  16-54;  Seventh 
Annual  Report  of  the  United  States  Commissioner  of  Labor. 

QUESTIONS 

1.  Can  you  mention  any  other  motives  for  industrial  effort 
than  those  named  in  §  7  ? 

2.  To  what  extent  is  the  increase  and  diversification  of  human 
wants  desirable  ? 

3.  How  important  are  place  and  time  utilities  as  compared 
with  the  others  mentioned  in  §  9  ? 

4.  What  changes  in  the  utility  of  different  commodities  oc- 
curred during  the  Great  War? 

5.  What  light  do  statistics  of  consumption  throw  upon  the 
comparative  prosperity  of  different  countries,  and  of  the  same 
country  at  different  times? 

6.  What  changes  in  the  consumption  of  our  people  are  to  be 
expected  as  a  result  of  national  prohibition  ? 


CHAPTER  m 

THE   PRODUCTION   OF   WEALTH 
I.  A  General  Survey 

§  17.  Since  man  does  not  create  matter,  the  production 
of  wealth  does  not  mean  the  creation  of  something  that 
was  previously  non-existent.  The  most  that  production 
human  powers  are  able  to  do  is  to  create  "^^fi"^*- 
utihties;  and  production  means,  therefore,  changing  the 
forms  or  relations  of  matter  so  that  it  becomes  better 
fitted  to  satisfy  human  wants.  Wood  or  iron  can  be  con- 
verted into  houses  or  machines ;  seeds  can  be  placed  in  the 
ground  where  natural  forces  act  upon  them  and  stimulate 
the  growth  of  plant  life ;  Dakota  wheat  can  be  transported 
to  Liverpool,  acquiring  increased  utihty  by  the  change 
of  place.  In  these,  and  all  other  cases,  production  means 
the  creation  oj  utilities. 

§  18.   In   the  development   of  the  arts  of  production 
five  historical  stages  can  be  distinguished.     In  the  most 
primitive  stage  wealth  is  obtained  by  hunting 
and  fishing,  with  the  aid  of  the  simplest  weapons  economic 

stages. 

and  implements.  The  second  is  the  stage  of 
pastoral  industry,  in  which  men  domesticate  various 
animals,  and  depend  chiefly  upon  their  herds  for  food 
and  clothing.  A  third  stage  is  reached  when  men  learn 
to  raise  plants  as  well  as  to  rear  animals.  Pastoral  peoples 
are,  of  necessity,  nomads,   since  they  are   compelled  to 

29 


30  THE  PRODUCTrOM  OF  WEALTH 

move  about  from  place  to  place  in  search  for  the  best 

pastures  for  their  flocks;    but  when  agriculture  becomes 

the  principal  industry,  men  settle  permanently  upon  the 

land  which  they  have  improved,  and  nomadic  existence 

comes  to  an  end. 

The  fourth   stage   is   marked   by  the  development  of 

manufactures   and   commerce.     Handicrafts,   which   pre- 

The  viously  have  been  merely  subsidiary  to  agri- 

handicrafts  . 

stage.  culture,  are  now  greatly  improved,  and  occupy 

a  larger  number  of  workers.  Division  of  labor  gradually 
arises  and  much  more  capital  is  employed,  although 
production  is  carried  on  mostly  by  hand,  aided  only  by 
the  motive  power  furnished  by  animals,  wind,  and  water. 
The  products  of  the  hand  trades  find  an  ever  widening 
market,  and  commerce  is  prosecuted  on  a  much  larger 
scale  than  in  the  pastoral  or  agricultural  stages.  Money 
comes  into  more  general  use,  as  the  indispensable  tool 
of  trade;  and  large  cities  now  arise  as  centers  of  manu- 
facturing or  commercial  industry.  In  antiquity  the  most 
flourishing  states  of  Greece  and  Italy  reached  this  stage 
of  development,  and  in  the  seventeenth  and  eighteenth 
centuries  of  the  Christian  era  the  leading  countries  of 
Europe  had  attained  a  similar  position. 

Finally,   since   1760,   the   most   advanced   countries  of 
the  western  world  have  reached  the  industrial  stage  of 

The  development.     England    led   the  way  for  the 

industrial  ^      .  °  ^  •' 

stage.  other  nations,  and  in  the  course  of  sixty  years 

her  industries  were  so  greatly  transformed  that  the  changes 
which  occurred  have  been  called  the  Industrial  Revolu- 
tion. The  invention  of  improved  appliances  for  spinning 
yarn  and  weaving  cloth  literally  revolutionized  first  the 


A    GENERAL   SURVEY  3 1 

cotton  and  later  the  other  textile  industries.  The  improve- 
ment of  the  steam  engine,  through  the  labors  of  James 
Watt  and  others,  supphed  a  practical  method  of  pumping 
water  out  of  mines  and  hoisting  coal  from  the  shafts ;  and 
thus  the  production  of  coal  was  greatly  increased.  With 
the  abundance  of  fuel  provided,  the  iron  industry  was 
stimulated  into  new  life,  and  soon  the  invention  of  the 
blast  furnace  and  other  appliances  completely  transformed 
conditions  there.  English  manufactures  began  to  advance 
by  leaps  and  bounds,  and  by  181 5  England  had  estab- 
lished that  industrial  supremacy  which  is  only  now  begin- 
ning to  pass  from  her  hands.  After  1790,  when  the  new 
cotton  machinery  was  successfully  installed  in  the  United 
States,  the  new  appliances  were  gradually  introduced 
into  other  lands,  and  by  1850  the  change  from  hand  to 
power  manufacture  was  substantially  complete  in  most 
of  the  great  staple  industries.  ^Meanwhile  the  steam 
engine  had  been  revolutionizing  methods  of  transporta- 
tion on  land  and  water,  and  the  electric  telegraph  was 
coming  into  use.  Commerce  had  been  enormously  in- 
creased by  the  cheapening  of  products  and  the  improved 
means  of  communication;  banking  facilities  had  been 
widely  extended;  small  stores  and  factories  had  been 
replaced  or  supplemented  by  larger  industrial  enterprises, 
and  the  business  man  of  the  middle  of  the  nineteenth 
century  had  been  placed  in  a  new  economic  world  which 
differed  from  that  in  which  his  grandfather  had  worked 
far  more  than  his  grandfather's  world  difTered  from  that 
of  the  best  days  of  the  Roman  Empire.  It  is  to  the  study 
of  the  industrial  stage,  in  which  wc  now  live,  that  the  greater 
part  of  this  book  will  be  devoted. 


32  THE  PRODUCTION  OF  WEALTH 

II.  The  Factors  of  Production 

§  19.  The  production  of  wealth  requires  the  coopera- 
tion of  three  factors,  —  nature,  man,  and  capital.  Of 
The  three  these,  nature  and  man  are,  from  the  econo- 
factors.  mist's  point  of  view,  the  original  factors  with 

which  the  science  starts;  while  capital  is  a  secondary 
or  derived  factor,  resulting  from  the  action  of  the  other 
two,  but  a  necessary  auxiliary  if  production  is  to  be  at 
all  copious.  It  will  now  be  desirable  to  study  each  of 
these  factors  in  some  detail. 

§  20.   Nature  assists  man  in  production  by  furnishing 

him  with  various  materials  upon  which  he  may  exert  his 

labor,  and  with  physical  and  chemical  forces 

-I)  Nature.  ,  '     -^ 

which  may  be  apphed  to  useful  ends.  The 
windmill,  water  wheel,  steam  engine,  and  electric  motor 
are  some  of  the  most  conspicuous  devices  for  utilizing 
natural  forces  in  production ;  but  the  cooperation  of  nature 
is  secured,  also,  in  the  ordinary  operations  of  agriculture 
and  stockraising. 

§  21.  The  United  States  has  been,  upon  the  whole, 
exceptionally  favored  in  the  natural  conditions  in  which 
Natural  ^^^  ccouomic  life  has  developed.     Its  vast  area 

conditions       —  2,070,000  square  miles,  exclusive  of  Alaska 

affecting  1  •  • 

American  and  outlying  possessions  —  not  only  furnishes 
subsistence  for  a  large  population,  but  supplies 
widely  differing  conditions  of  soil  and  climate  that  enable 
the  country  to  raise  a  large  variety  of  agricultural  prod- 
ucts.^    American   farms   now   include  478,451,000   acres 

^  The  arid  regions,  which  extend  from  about  the  one  hundredth  meridian 
to  within  two  hundred  miles  of  the  Pacific  coast,  are  the  only  unfavorable 
section  of  the  United  States.     Their  extent  is  large  —  from  one  third  lo 


THE  FACTORS  OF  PRODUCTION  33 

of  impro\ed  land,^  and  as  much  more  that  is  unimproved. 
From  them  are  produced  enormous  crops  of  cereals  ^  and 
nearly  sixty  per  cent  of  the  world's  supply  of  cotton,^ 
besides  an  abundance  of  fruit  and  vegetables,  as  well  as 
hay,  tobacco,  cattle,  and  dairy  products.  "Both  food 
supplies,"  the  census  tells  us,  "and  agricultural  materials 
for  manufacture  are  cheaper,  more  abundant,  and  more 
varied  in  the  United  States  than  in  any  other  manufac- 
turing country."  Tea,  coffee,  sugar,  and  wool  are  almost 
the  only  important  vegetable  or  animal  products  for  which 
we  are  obliged  to  depend  wholly  or  largely  upon  external 
sources  of  supply. 

In  respect  of  mineral  resources  the  country  is  equally 
fortunate,    producing    in    abundance    almost    everything 
required    by    manufacturing    industries.     Soft  Mineral 
coal,  upon  which  modern  manufactures  depend,  resources, 
is  found  in  many  states,  and  is  readily  transported  to  all 

two  fifths  of  the  whole  area  of  the  coi'.ntry ;  but  a  portion  can,  by  means 
of  irrigation,  be  made  available  for  agricultural  purposes,  a  part  can  be 
used  for  pasture,  a  part  for  forests;  while,  of  course,  the  Rocky  Mountains 
are  very  rich  in  mineral  treasures. 

^  The  improved  farm  lands  equal  648,000  square  miles,  or  the  entire 
area  of  France,  Germany,  Austria,  and  Italy. 

*  Inigi  7  ihc  quantity  of  cereals  produced  and  exported  was  as  follows :  — 


Produced 

Exported 

Com 

Wheat 

Oats 

Rye 

Barley 

2,566,900,000  bu. 

636,300,000  bu. 

1,587,000,000  bu. 

60,145,000  bu. 

298,975.000  bu. 

66,700,000  bu. 
203,500,000  bu. 

*In  1910  the  world's  supply  of  cotton  was  9,182,500,000  pounds. 
Of  this  the  United  States  produced  5,724,900,000  pounds. 


34  THE  PRODUCTION'  OF   WEALTH 

industrial  centers ;  -^  while  a  large  supply  of  anthracite 
is  procured  from  Pennsylvania.  Iron  ore  is  produced 
in  enormous  quantities,  our  output  far  exceeding  that 
of  any  other  country.^  For  industrial  purposes,  iron 
is  the  most  precious  of  the  metals,  so  that,  in  possessing 
the  world's  largest  available  supphes  of  coal  and  iron, 
the  position  of  the  United  States  is  unique.  Since  the 
development  of  electrical  industries  in  recent  years,  copper 
has  taken  rank  among  the  most  important  metals;  and 
in  respect  of  this  product  our  country  is  more  fortunate 
than  all  others,  producing  in  191 1  some  548,000  tons 
out  of  a  total  world  supply  of  979,000  tons.  Nor  is  there 
a  lack  of  the  less  important  minerals,  with  the  single  ex- 
ception of  tin.  Finally  we  should  note  that  ever  since 
the  Califomian  discoveries  in  1849,  the  United  States 
has  been  one  of  the  great  gold-producing  countries  of  the 
world;  while  since  1870  the  opening  of  silver  mines  in 
Nevada  and  elsewhere  has  given  it  a  prominent  position 
as  a  producer  of  the  white  metal.  Only  Australia  and 
South  Africa  now  rival  this  country  in  the  production  of 

*  In  191 1  the  world's  coal  production  was  as  follows:  — 

United  States 496,221,000  tons. 

Great  Britain 304,518,000  tons. 

Germany 258,223,000  tons. 

Other  countries    ....   241,038,000  tons. 
Total 1,300,000,000  tons. 

^  In  1909  the  world's  production  of  iron  ore  was :  — • 

United  States 51,155,000  tons. 

Germany 25,504,000  tons. 

Great  Britain 14,804,000  tons. 

France 11,890,000  tons. 

Other  countries      ....   21,786,000  tons. 
Total 125,139,000  tons. 


THE  I^ACTORS  OF  PRODt/CT/OAT  ^5 

gold;  and  Mexico,  in  the  mining  of  silver;  while  in  the 
output  of  the  two  metals,  the  United  States  stands  pre- 
eminent,^ So  far,  then,  as  the  mineral  resources  of  the 
world  are  now  known,  it  would  appear  that  nature  has 
dealt  with  no  other  land  so  bountifully  as  with  our  own. 
Besides  the  many  excellent  harbors  which  facilitate 
commercial  intercourse  with  foreign  lands  and  between 
the   seacoast    states,    the    United   States   pos- 

Waterways. 

sesses  important  mland  waterways.  The 
Hudson,  the  Delaware,  and  the  James  rivers  have  long 
been  highways  of  commerce;  but  far  more  significant 
is  the  part  which  the  Mississippi  and  its  tributaries  have 
played  in  the  development  of  the  central  states.  These 
rivers  furnish  many  thousand  miles  of  navigable  waters, 
so  that  the  introduction  of  the  steamboat  after  1815  brought 
almost  all  parts  of  the  Mississippi  Valley  into  communica- 
tion with  each  other.  Most  important  of  all  to-day  are 
the  Great  Lakes  which,  with  the  canals  that  connect  them 
at  various  points,  now  furnish  an  unbroken  highway 
one  thousand  miles  long,  and  carry  a  freight  traffic  equal 
to  two  fifths  of  all  the  tonnage  transported  by  the  railways 
of  the  countr}-.  With  excellent  harbors,  with  18,000 
miles  of  navigable  rivers,  and  with  the  largest  lake  system 
in  the  world,  our  industries  have  not  lacked  natural  aids 
to  the  cheap  assembling  of  raw  materials  and  the  ready 
shipment  of  completed  products. 

§  22.  Through  his  own  labor,  man  becomes  the  second 
factor  in  production;   without  it  he  "would  necessarily 

'  In  1916  the  world's  Rold  output  was  22,107,000  fine  ounces,  of  which 
the  United  States  produced  4,479,000;  while  the  silver  output  was 
156,626,000  ounces,  of  which  this  country  supplied  74,414,000. 


36  THE  PRODUCTION-  OP  WEALTH 

perish  from  the  face  of  the  earth  even  if  all  soils  were 
fertile  and  all  climates  temperate."     Labor,  therefore,  is 

Man  ^^  imperious  necessity,  but  furthermore  is,  and 

always  has  been,  a  needful  discipHne  and 
the  means  through  which  men  have  learned  most  of  the 
virtues  that  have  enabled  them  to  advance  from  barbarism 
to  civiHzation.  Although  sometimes  distinctly  pleasure- 
able,  as  the  work  of  the  scholar  or  the  artist,  and  to  some 
extent  attractive  in  most  of  its  forms,  labor  involves  both 
bodily  fatigue  and  the  sacrifice  of  leisure  that  could  be 
used  for  other  purposes.  For  this  reason  it  is  probably 
true  that  most  men  need  to  be  spurred  on  to  their  daily 
toil  by  the  knowledge  that,  if  they  will  not  work,  they 
shall  not  eat. 

However  great  its  educational  influence  may  be,  labor 
is  not  an  end  in  itself;  rather  must  it  be  considered 
a  means  to  the  end  of  a  plentiful  production 
end^innsetf!  ^^  commodities.  Therefore  we  cannot  approve 
of  attempts  to  make  work  for  men  to  do  by 
resisting  the  introduction  of  labor-saving  machinery  or 
by  lavish  expenditure  on  the  part  of  the  rich.^  With 
the  resources  now  at  its  disposal,  society  is  unable  to  pro- 
duce all  the  things  desired  by  its  members.  An  improved 
machine  or  process  sets  free  a  certain  portion  of  the  labor 
force  which  can  be  employed  in  satisfying  needs  that 
form.erly    went    unsupplied;     while    lavish    expenditure 

^  A  wealthy  Frenchman,  it  is  said,  used  to  break  his  wine  glass  after 
finishing  his  repast,  with  the  remark,  "  The  world  must  live."  Any  one  who 
approves  of  such  methods  of  benefiting  the  poor  might  ask  himself  how 
much  good  would  be  done  if  the  rich  would  only  make  a  practice  of  break- 
ing tableware  and  destroying  the  rest  of  their  household  belongings. 


THE  FACTORS  OF  PRODUCTION'  37 

exhausts  productive  power  that  might  have  ministered 
to  some  reasonable  want.  Even  if  the  production  of 
wealth  should  ever  be  so  great  as  to  satisfy  all  rational 
needs,  it  would  still  be  desirable  to  employ  improved 
methods  and  appliances,  since  these  things  would  insure 
greater  leisure  to  cultivate  higher  faculties  or  to  enjoy 
the  wealth  produced. 

§  23.  In  the  individual  laborer  efficiency  depends  upon 
a  variety  of  factors  which  deserve  a  moment's  attention. 
Original  endowments  of  strength  and  vigor  Efficiency 
vary  greatly  from  one  group  of  laborers  to  o*i^^°''- 
another,  men  of  some  races  surpassing  others  by  fifty  or 
one  hundred  per  cent  in  mere  muscular  strength  and 
physical  endurance.  Acquired  skill  and  knowledge  are 
other  important  factors,  since  in  apparent  capacity  for 
improvement  workmen  differ  as  widely  as  in  their  original 
bodily  endowments.  Not  ever}'  common  laborer  is  able 
to  develop  the  dexterity  and  the  power  of  sustained,  intelli- 
gent action  required  of  a  skilled  mechanic  in  charge  of 
an  expensive  and  dehcate  machine.  A  third  condition 
upon  which  efficiency  depends  is  the  enjoyment  of  good 
food  and  comfortable  shelter;  underfed  laborers  lack 
bodily  vigor,  and  crowded,  unsanitary  tenements  enfeeble 
the  workmen  and  cause  disease.  Then  the  mental  and 
moral  quahfications  of  the  laborer  constitute  a  fourth 
factor,  since  intelligent  and  conscientious  workmen  require 
less  superintendence,  can  be  intrusted  with  work  for 
which  others  are  unsuitcd,  and  prove  most  effective  and 
least  wasteful.  Finally  the  social  esteem  in  which  labor 
is  held  and  the  legal  and  political  position  of  the  laborer 
are  factors  of  the   utmost   importance.     When   labor  is 


38  THE  PRODUCTION  OF  WEALTH 

considered  honorable,  and  wide  opportunities  are  open  to 
the  man  who  renders  the  most  effective  service,  laborers 
will  display  energy  and  ambition  that  will  vastly  increase 
the  value  of  their  work.  In  this  particular  the  contrast 
between  the  United  States  and  other  countries  is  most 
marked;  even  recent  immigrants,  who  can  expect  Httle 
change  in  their  own  position,  show  themselves  eager  to 
toil  to  the  utmost  in  order  that  their  children  may  enjoy 
opportunities    denied    to    themselves. 

Efficiency  remaining  constant,  the  labor  power  of  a 
country  with  a  given  population  will  depend  upon  the  pro- 
^jjg  portion  of  the  people  who  are  engaged  in  use- 

proportion       fui  pursuits.     The  statistics  usually  presented 

of  laborers  _  ■'    ^ 

in  useful         in  discussions  of  this  subject  give  the  number 

pursuits. 

"engaged  in  gainful  occupations,"  to  use  the 
words  of  our  federal  census.  x\s  shown  in  our  open- 
ing chapter,  slightly  less  than  two  fifths  of  our  total  popu- 
lation is  so  employed;  and,  upon  this  basis,  our  labor 
force  consists  of  29,285,000  persons.  But  these  data 
necessarily  omit  the  multitude  of  women,  and  even  children, 
engaged  in  useful  labor  within  their  homes ;  and,  therefore, 
do  not  give  an  adequate  idea  of  the  true  labor  force  of 
the  country.  For  many  purposes  the  figures  may  suffice, 
but  they  do  not  represent  our  entire  labor  force,  as  the 
term  is  here  used. 

Finally,  if  efficiency  and  the  proportion  of  useful 
workers  remain  the  same,  the  labor  force  of  a  country 

will  vary  directly  with  the  number  of  its  inhabit- 
Population. 

ants.  The  growth  of  population  is  determined 
by  two  factors  —  the  natural  rate  of  increase  and  the 
gain  of  numbers  through  immigration. 


THE  FACTORS   OF  PRODLTCT/ON'  39 

§  24.  The  natural  increase  of  population  depends 
upon  the  proportion  which  births  bear  to  deaths.  In 
a  community  of  10,000  persons,  300  births  The  growth 
or  deaths  a  year  will  give  a  birth  or  death  of  population 
rate  of  30  per  thousand.  If  both  the  birth  and  the  death 
rates  remain  at  30,  population  will  be  stationary;  if, 
however,  the  normal  birth  rate  is  35  and  the  death  rate 
25,  the  annual  increase  will  be  10  per  thousand,  or  one 
per  cent.  From  187 1  to  1890  the  average  birth  rates 
of  the  principal  countries  of  Europe  varied  from  44  in 
Hungary  to  24.6  in  France;  while  death  rates  ranged 
from  33.7  for  Hungary  to  16.9  for  Norway.  Generally, 
the  higher  birth  rates  were  accompanied  by  high  death 
rates,  so  that  they  did  not  imply,  necessarily,  an  extremely 
rapid  increase  of  population.  Thus  Hungary  had  a  birth 
rate  of  44,  and  Norway  a  rate  of  30.7 ;  but  the  Hungarian 
death  rate  was  33.7,  while  the  Norwegian  was  only  16.9; 
so  that  the  latter  countr}'  showed  a  net  increase  of  13.8, 
and  the  former  an  increase  of  only  10.3.  In  most  of  the 
countries  of  Europe  population  has,  for  a  century  or  more, 
shown  a  steady  increase;  but  France,  with  a  birth  rate 
of  24.6  and  a  death  rate  of  22.8,  has  remained  almost 
stationary  in  recent  years.  For  the  United  States  the 
somewhat  conjectural  estimates  of  the  census  indicate 
a  birth  rate  of  35.1  and  a  death  rate  of  17.4,  a  net  increase 
of  17.7. 

In  the  causes  that  influence  the  movement  of  popula- 
tion we  come  to  a  topic  that  has  played  an  important 
part  in  economic  discussion  ever  since  1798,  The  theory 
when    Thomas    Robert    Malthus,    an    English  ofM.uhus. 
clergyman,  published  his  celebrated  "Essay  on  the  Prin 


40  THE  PRODUCTION  OF  WEALTH 

ciple  of  Population."  In  the  form  which  his  theor}' 
assumed  in  the  later  editions  of  this  book,  Malthus  taught 
that,  if  unrestrained  by  anything  except  the  mere  physio- 
logical limits,  population  would  increase  in  a  geometrical 
ratio,  doubling  in  periods  of  about  twenty-five  years.  He 
contended,  furthermore,  that,  at  the  best,  the  food  supply 
can  only  be  increased  in  an  arithmetical  ratio;  so  that, 
if  the  natural  rate  of  the  increase  of  population  be  repre- 
sented by  the  series  2,  4,  8,  16,  32,  etc.,  the  growth  of  the 
food  supply  would  be  not  greater  than  is  represented  by 
the  series  2,  3,  4,  5,  6.  From  these  facts  he  argued  that 
population  tends  continually  to  outstrip  the  available 
means  of  subsistence,  and  is  kept  down  to  the  necessary 
Hmits  by  a  series  of  restraints,  such  as  war,  famine,  pesti- 
lence, ordinary  diseases,  vice,  misery,  and  prudential 
checks.  The  conclusion  which  Malthus  finally  reached 
was  that  the  prudential  restraints,  by  which  he  meant 
the  moral  considerations  that  should  lead  a  man  to  refrain 
from  marrying  before  he  is  able  to  support  a  family,  should 
be  encouraged,  in  order  that  famine,  vice,  and  disease 
need  not  be  called  into  operation. 

Into  the  criticism  or  defense  of  Malthusianism  we 
have  not  the  time  to  enter,  but  the  following  considera- 
our  tions  concerning  the  movement  of  population 

conclusions.     ^^^^    ^^^^^    ^^^    attention.     Without    doubt 

the  physiological  possibilities  of  the  growth  of  numbers 
are  very  great,  since,  as  has  happened  in  the  United 
States,  population  has,  by  natural  increase,  repeat- 
edly doubled  in  periods  of  twenty-five  years.  On  the 
other  hand,  numbers  must  be  restricted  to  the  limits 
imposed  by  the  necessity  of  procuring  subsistence;    and 


THE  FACTORS   OF  PRODUCTION'  41 

if  population  is  imprudently  multiplied  beyond  this  point, 
then  famine  or  disease  must  reduce  numbers,  as  happens 
continually  among  uncivilized  races.  Among  civilized 
peoples,  however,  a  proper  regard  for  the  future  may  lead 
men  to  postpone  marriage  until  its  responsibihties  can 
be  undertaken  prudently ;  and  this  moral  jestraint  may, 
as  Malthus  urged  it  should,  adjust  numbers  to  the  resources 
of  the  community. 

The  economic  force  which  gives  strength  to  this  moral 
restraint  is  the  desire  to  maintain  one's  standard  of  living. 
Each  class  of  people  in  any  society  is  accus-  xhe  standard 
tomed  to  enjoy  a  greater  or  less  quantity  of  °*'>^'°e- 
the  comforts  and  luxuries  of  hfe.  This  quantity  forms 
the  standard  of  hving  for  any  particular  class,  and  prudent 
people  will  not  marr}'  until  they  have  the  prospect  of 
incomes  sufficient  to  support  themselves  and  their  children 
in  the  degree  of  comfort  that  they  have  been  accustomed 
to  enjoy.  The  standard  is  not  an  absolutely  fixed  quan- 
tity; but,  on  the  contrary,  can  be  raised  or  lowered. 
Educational  influences  that  arouse  new  wants  tend  to 
elevate  the  standard;  while  a  series  of  discouragements 
and  misfortunes  may  lead  a  family  to  accept  a  lower  one. 
In  proportion  as  people  are  prudent  enough  to  insist  upon 
maintaining  their  accustomed  scale  of  living,  the  popula- 
tion will  be  adjusted  readily  enough  to  the  limits  imposed 
by  subsistence.  Upon  the  other  hand  any  classes  of 
persons  who  disregard  the  plain  dictates  of  prudence 
may  expect  to  encounter  some  of  the  harsher  restraints 
upon  population,  and  have  only  themselves  to  blame 
for  the  suffering  which  their  recklessness  occasions. 

§  25.   Immigration,  the  second  influence  affecting  the 


42  THE  PRODUCTION  OF   WEALTH 

growth  of  population,  has  been  a  factor  of  the  greatest 
importance  in  the  United  States.  Migrations  of  men 
take  place  in  all  countries;  but  in  Europe, 
since  the  great  discoveries  of  the  fifteenth  and 
sixteenth  centuries,  emigrants  to  the  newly  discovered 
lands  have  usually  exceeded  the  immigrants  from  all  sources 
whatever.  Immigration  into  the  United  States  was  com- 
paratively small  from  1790  to  1820;  but  then  it  began 
to  increase,  and  by  1840  had  assumed  large  proportions, 
which  it  has  maintained  ever  since.  In  1850  there  were 
2,244,602  persons  of  foreign  birth  in  this  country,  and  thej 
formed  9.7  per  cent  of  the  total  population ;  by  1910  the 
number  had  grown  to  13,515,800,  and  the  percentage 
of  foreign-bom  inhabitants  had  risen  to  14.7.  In  addi- 
tion to  this,  there  were,  in  the  latter  year,  no  less  than 
18,897,000  native  white  persons  who  were  of  foreign 
parentage. 

The  common  view  concerning  the  economic  effects 
of  immigration  upon  the  United  States  is  fairly  represented 
Effects  of  by  the  following  extract  from  a  well-known 
immigration  j,  ^j  reference:   "It  has  supphed  the  labor 

in  tne  Unitea  ^  ^ 

States.  force  which  was  necessary  to  bring  the  soil 

under  cultivation.  It  has  enabled  us  to  take  up  vast 
stretches  of  territory.  It  has  built  railroads,  dug  canals, 
made  highways,  cut  down  forests,  —  in  short,  turned  the 
wilderness  into  cultivated  land.  It  is  safe  to  say  that 
without  this  immigration  the  growth  of  the  country  would 
have  been  very  much  slower,  and  that  we  should  only 
now  be  where  we  were  twenty  years  ago."  But  there  is 
reason  for  thinking  that  such  a  view  of  the  matter  over- 
looks  certain   very  important   considerations. 


THE  FACTORS  OF  PRODUCTION 


43 


The  fact  is  that,  prior  to  the  time  when  immigration 
became  large,  the  population  of  the  country  increased 
at  a  rate  that  was  even  more  rapid  than  that 
shown  after  the  arrival  of  large  numbers  of 
immigrants.  This  is  proved  beyond  question  by  the 
following  statistics :  — 


Some  data. 


It  will  be  seen  that,  in  the  decades  ending  in  1800  and 
1810,  the  natural  increase  of  the  native  inhabitants,  in 
the  absence  of  any  considerable  immigration,  The  rapid 
caused    a    growth    of    population    amounting  "n^creTseof 
to  35  and  36  per  cent;    while  in  the  decades  f^P^J;;;^"" 
ending  in   1820  and   1830,   when  immigration  times, 
was  still  small,  the  rate  of  increase  was  t^-^,  \)QX  cent.     Prior 
10  1820,  therefore,  the  [)0[)ulation,  when  it  was  dependent 
solely   upon   the   natural   increase  of  numbers,   grew  as 
rapidly  as  at  any  subsequent  period.     This  was  due  to 


44  THE  PRODUCTION  OF  WEALTH 

exceptional  circumstances,  chiefly  to  the  fact  that  the 
United  States  was  expanding  over  a  vast  area  of  fertile 
land ;  so  that  an  increase  of  numbers  meant  not  so  much 
an  increase  of  mouths  to  be  fed  as  an  addition  to  the  labor 
that  could  be  employed  in  cultivating  the  soil.  Under 
such  conditions,  which  made  it  possible  for  each  new 
family  to  take  up  a  farm,  marriage  occurred  at  an  early 
age,  families  were  large,  and  nothing  checked  the  growth 
of  population  except  the  physiological  hmitations  upon 
its  increase. 

The  growth  of  numbers  and  the  gradual  disappearance 

of  free  land  would  have  changed  the  situation  in  time, 

even   if   no   new   factor   had   intervened.     As 

This  was 

checked  by  population  became  more  dense,  it  would  not 
immigra  ion.  ^^^^  \,qqt^  SO  easy  to  raise  famihes  of  six,  eigh<^, 
or  ten  children;  and  the  rate  of  natural  increase  must 
inevitably  have  dechned.  There  are  indications  that 
chis  poirt  was  just  being  reached  whm  immigration 
assumed  such  large  proportions  after  i8-,o.  In  any  case 
the  inflo\\  of  a  vast  army  of  foreign  la-orers  with  lower 
standards  of  living  brought  to  an  end  the  easy  conditions 
cf  Hfe  v/hich  had  made  possible  the  unprecedented  natural 
increase  of  numbers  from  1790  to  1830.  This  it  did  in 
two  ways.  In  the  first  place,  precisely  as  the  natural 
increase  of  population  would  have  done  ultimately,  the 
vast  numbers  of  immigrants  hastened  the  disappearance 
of  free  land  —  at  first  in  the  older  states,  but  finally  even 
in  the  far  W  est.  In  the  next  place,  having  lower  standards 
of  living,  the  immigrants  could  drive  :he  native-born 
inhabitants  (  ut  of  the  ruder  employments  by  their  wilhng- 
ness- at  first  to  accept  lower  wages.     As  President- Hadlej 


THE  FACTORS  OF  PRODUCTION'  45 

of  Yale  University  has  put  it,  "The  Irishman  in  1830 
forced  the  American  up ;  the  Italian  and  the  Canadian 
have  forced  the  Irishman  up,"  Although  this  process 
drove  the  native-bom  into  the  higher  occupations,  it 
increased  very  greatly  the  expense  of  educating  a  family 
of  children  to  the  callings  followed  by  their  parents,  and 
rapidly  checked  the  natural  increase  of  the  native  popula- 
tion. In  this  view  of  the  case,  therefore,  immigration 
has  not  added  to  our  total  population  so  much  as  it  has 
given  us  foreign-born  in  the  place  of  native-born  inhabit- 
ants. It  may  be  too  much  to  say  that  our  population 
would  have  been  exactly  as  large  if  immigration  had  never 
advanced  beyond  the  proportions  reached  in  1830,  but 
it  is  very  probable  that  the  net  result  has  been  to  change 
the  composition  rather  than  to  raise  the  aggregate  number 
of  our  people. 

§  26.  We  have  now  come  to  the  third  factor  of  produc- 
tion, capital,  which  is  necessary  in  all  except  the  most 
primitive     kinds    of     industry.     Indeed,    the 

(3)  Capital. 

hands  of  man,  unaided,  would  hardly  be  able 
to  do  more  than  gather  wild  fruits  and  nuts,  or  procure 
a  few  other  things  that  nature  yields  to  the  labor  of  mere 
appropriation.  Most  goods  cannot  be  obtained  by  the 
direct  application  of  human  labor,  and  must  be  secured 
by  an  indirect  process  of  approach.  If  men  will  first 
fashion  fish  nets  or  hunting  weapons,  they  can  then  obtain 
fish  or  game  which  otherwise  it  would  be  imj)ossiblc  In 
procure;  if  they  will  first  devote  some  labor  to  the  manu- 
facture of  a  plow  and  harrow,  they  can  place  seeds  in  the 
ground  under  such  conditions  that  a  bountiful  harvest 
will  be  secured;    or  if  they  will  first  construct  a  water 


46  THE  PRODt/CT/OIV  OF  WEALTH 

wheel  or  a  steam  engine,  they  may  harness  water  or  steam 
in  the  production  of  results  that  no  amount  of  unaided 
human  effort  could  possibly  attain.  In  all  such  cases 
:nen  adopt  an  indirect  or  roundabout  method  of  satisfy- 
ing their  wants ;  they  first  produce  tools  or  machines,  and 
then  utihze  these  instruments  in  the  production  of  wealth. 
Indirect  methods  of  production  are  far  more  effective 
than  direct,  because  they  enable  man  to  utilize  all  the 
materials   and   forces   which    nature   supplies. 

indirect  _  '-  •■ 

methods  of      Such  materials  as  the  useful  metals,  for  instance, 

production.  ,  ,  ,  . 

could  never  have  been  wrought  mto  a  form 
adapted  to  human  use  without  various  appliances  of 
indirect  production.  Even  a  material  Hke  wood  cannot 
be  utihzed  to  any  purpose  without  the  employment  of 
suitable  implements.  Heat  and  moisture  cannot  insure 
a  good  crop  unless  the  soil  has  been  prepared  by  proper 
tools;  and  air,  water,  steam,  and  electricity  are  powerless 
to  assist  industry  unless  they  are  brought  into  operation 
by  the  right  sort  of  machines.  Indirect  processes,  there- 
fore, enable  man  to  secure  the  fullest  cooperation  of  nature, 
and  vastly  increase  the  production  of  wealth. 

Capital,  then,  may  be  defined  as  all  the  intermediate 
products  which  man  creates  for  the  purpose  of  employ- 
capiui  ing  them  in  the  production  of  finished  com- 

deflned.  modities,    or,    more    briefly,    as    the    produced 

instruments  oj  production.  The  various  objects  included 
in  our  definition  are  sometimes  described  as  producer's 
goods,  and  are  contrasted  with  products  ready  for  final 
consumption,  which  are  termed  consumer's  goods.  Some 
difficult  or  controverted  points  connected  with  the  defini- 
tion are  for  the  moment  postponed. 


THE  FACTORS  OF  PRODUCTION  47 

§  27.   It  will  be  helpful  at  this  time  to  enumerate  the 
concrete    forms    which    capital    may    assume.   The  concrete 

,  .  ,        .J,        .  .   ,,  forms  of 

A  convenient  classincation  runs  as  lollows :  —  capital, 
(i)    Productive  improvements  upon  land,  such  as  fences 
or  drains. 

(2)  Buildings,  such  as  barns,  factories,  or  stores,  devoted 
to  productive  industry. 

(3)  Means  of  transportation,  such  as  roads,  canals,  or 
railways. 

(4)  Raw  materials,  as  wool,  iron,  cotton,  or  silk,  which 
are  consumed  in  the  act  of  production,  but  reappear 
in  the  product. 

(5)  Auxiliary  materials,  as  coal,  lubricating  oils,  or  bleach- 
ing materials,  which  do  not  reappear  in  the  product. 

(6)  Tools  and  machines. 

(7)  Domesticated  animals  used  in  production.  Our 
domestic  animals  have  been  so  much  improved  by 
breeding  that  they  are  distinctly  a  product  of  human 
industry. 

(8)  Money,  weights,  and  measures  are  important  aids 
to  modern  industry,  which  is  based  on  exchange. 

(9)  Commercial  stocks  of  finished  products.  These 
commodities,  while  still  in  the  hands  of  merchants, 
are  strictly  to  be  considered  as  materials  to  which 
place  or  time  utilities  are  being  added. 

(10)  Books,  instruments,  and  all  other  appliances  used 
by  persons  who  render  personal  services.  The 
instruments  of  the  surgeon  or  the  books  and  scientific 
apparatus  of  the  student  are  examples. 

In  returning  now  to  the  diflicult  questions  raised  by 
our  dcfinili(^n,  something  should  be  said  concerning  two 


48  THE  PRODUCTION  OF  WEALTH 

things  which  have  been  excluded  from  the  concrete 
forms  of  capital.  Land  was  omitted  because  it  is  not  a 
Land  is  product  of  human  industry  devoted  to  produc- 

not  capital.  ^j^,g  purposcs.  It  is  a  necessary  instrument 
of  production,  of  course;  but  it  is  supplied  by  nature, 
not  by  human  effort,  and  has  been  treated  adequately  in 
our  discussion  of  nature  as  a  factor  of  production.  It 
must  be  separated  from  capital  unless  we  are  willing  to 
confuse  the  parts  which  man  and  nature  play  in  produc- 
tive industr}'.  To  this  view  of  the  case  the  objection  is 
sometimes  raised  that  much  land  has  been  so  improved 
by  human  effort  that  it  is  no  longer  a  mere  gift  of  nature. 
But  our  definition  classifies  the  improvements  as  capital, 
and  places  the  land  itself  in  a  separate  category.  Again 
it  is  objected  that  such  improvements  as  fertilizers  and 
drains  become  in  time  inextricably  merged  with  the  land ; 
but  this  is  a  reason  for  exercising  care  in  applying  our 
definition,  and  not  for  refusing  to  discriminate  between 
two  things  that  are  usually  so  clearly  distinguishable  as 
land  and  capital. 

From  our  list  of  the  forms  of  capital,  man's  acquired 
faculties  also  are  excluded,  contrary  to  the  usage  of  some 
Ac  uired  economists.  We  must  admit  that  acquired  skill 
faculties         or  technical  knowledge  is  a  product  of  human 

not  capital.  rr  i      i 

effort,  and  that  it  may  be  employed  in  the 
production  of  wealth.  But  all  this  is  satisfactorily 
accounted  for  in  our  discussion  of  labor  as  a  factor  of 
production,  and  there  is  no  need  of  introducing  it  in  our 
treatment  of  capital.  No  practical  difficuhy  arises  if  one 
wishes  to  follow  such  a  course,  but  it  seems  more  con- 
venient to  take  account  of  acquired  skill  and  technical 


THE  FACTORS   OF  PRODUCTION-  49 

knowledge  when  we  consider  the  part  that  labor  plays  in 
production. 

One  further  word  should  be  said  concerning  commercial 
stocks  of  finished  products,  which  were  included  among 
the  concrete  forms  of  capital.  Many  economists  have 
counted  as  capital  all  food  and  clothing,  the 

^  °'  The  case  of 

subsistence   of   laborers,    on    the   ground   that  commercial 

stocks 

these  things  enable  men  to  produce  more  goods. 
In  our  view  of  the  matter,  however,  food  and  clothing 
are  capital  only  so  long  as  they  are  a  part  of  the  stocks 
of  goods  to  which  middlemen  are  adding  place  and  time 
utihties.  When  they  reach  the  laborer,  they  become  con- 
sumer's goods,  and  the  use  which  he  makes  of  them  is 
considered  an  act  of  final,  and  not  productive,  consumption. 
The  opposite  view  converts  the  laborer  into  a  mere 
machine,  and  makes  production,  instead  of  consump- 
tion, the  end  of  industrial  processes. 

§  28.  We  are  now  ready  to  consider  certain  other  methods 
of  classifying  the  various  forms  of  capital.     A  distinction 
is   usually   drawn   between   jixed   capital   and 
circulating    capital.      The   former    consists   of  methods  of 

classifying. 

such  objects  as  buildings,  tools,  and  machines, 
which  can  be  used  in  repeated  processes  of  production; 
the  latter  comprises  fuel  or  raw  materials,  which  are  con- 
sumed in  a  single  process.  More  important  is  a  second 
distinction  which  is  made  between  free  and  specialized 
capital.  Free  capital  exists  in  such  a  condition  that  it 
may  be  applied  to  any  one  of  a  number  of  industries; 
while  specialized  capital  is  invested  in  such  a  manner 
that  it  assumes  a  fixed  form,  and  cannot  be  withdrawn 
without   partial    or   total   loss.     Coal,    lumber,    iron,    and 


50  THE  PRODUCTION  'OF  WEALTH 

bricks  are  relatively  free  capital,  because  they  might  be 

invested  in  many  different  industries ;  while  blast  furnaces, 

steel  rails,  and  carpet  looms  are  so  specialized  that  they 

can  be  used  for  only  a  single  purpose. 

§  29.   It  remains  for  us  to  study  the  process  by  which 

capital  is  formed  and  accumulated.     Obviously  the  first 

The  step  is  the  collection  of  materials  and  fashion- 

formation  .  r     1        •        1  1     1    •         1 

of  capital.  mg  of  the  implements  needed  m  the  process 
of  indirect  production;  all  capital,  therefore,  is  the  result 
of  labor  expended  in  creating  it.  This  labor  may  be 
expended  by  the  person  who  accumulates  the  capital, 
or  by  other  persons  whom  he  hires  to  work  for  him.  Thus 
a  farmer  produces  capital  when  he  builds  a  fence  or  digs 
a  drain,  and  a  manufacturer  produces  it  when  he  hires 
masons  and  carpenters  to  erect  a  factory  building.*  If 
the  person  who  desires  to  build  and  equip  a  factory  or 
railroad  has  not  all  the  funds  required  for  the  purpose, 
he  may  borrow  from  private  capitalists  or  from  banks 
the  sums  needed  to  complete  the  undertaking.  Bankers 
make  a  business  of  receiving  larger  or  smaller  sums  of 
money  which  depositors  do  not  happen  to  need  for  use. 
and  of  lending  such  sums  to  persons  who  wish  to  establish 
or  extend  business  enterprises.  A  business  corporation 
secures  its  capital  from  the  numerous  investors  who 
purchase  shares  of  its  stock.  Usually  when  capital  is 
supplied  by  banks  or  raised  by  a  corporation  through  the 
sale  of  its  stock,  it  is  said  that  money  is  invested  in 
the  new  undertaking;  but,  in  reality,  the  money  is  merely 
the  means  by  which  the  lender  or  investor  transfers  to  the 
manager  of  the  enterprise  control  over  the  labor  power 
needed  for  its  development.     In  all  cases,  from  that  of 


THE  PACTOkS  OF  PRODUCTION  ^t 

the  farmer  who  digs  a  drain  to  that  of  the  corporation 
which  issues  its  securities,  the  process  ultimately  involved 
is  setting  in  motion  the  labor  required  in  the  production 
of  capital. 

But  this  is  not  the  whole  of  the  matter.  The  labor 
that  constructs  a  barn  or  builds  a  factory  might  have 
been   used   in   producing   consumption   goods 

.  .        ^  .  ^  °  The  present 

v/hich  would  immediately  satisfy  some  human  sacrificed 

_,,        ,  1      1         r  1        to  ^'^^  future. 

want,  ihe  barn  and  the  factory,  upon  tiie 
other  hand,  are  able,  of  themselves,  to  satisfy  no  want 
when  their  construction  is  completed.  They  are  useful 
only  for  the  production  of  goods  that  will  be  available 
at  some  future  time,  and  it  may  be  years  before  they  can 
be  expected  to  return  to  the  owner  the  value  represented 
by  his  investment.  The  production  of  capital,  therefore, 
always  involves  the  sacrifice  of  the  present  enjoyments 
that  the  command  over  a  certain  amount  of  labor  could 
give,  for  future  satisfactions  which  the  investor  expects 
to  derive  from  his  outlay;  it  always  presupposes  a  prefer- 
ence for  future  goods  rather  than  for  present  enjoyments, 
and  it  involves  a  sacrifice  of  the  present  to  the  future. 

This  fact  is  the  basis  for  the  customary  statement  that 
capital  is  the  result  of  aljstinence  as  well  as  of  production. 

Socialists  are  pleased  to  ridicule  such  a  state- 
Abstinence, 
ment,   and   to   inquire   how   much   abstinence 

is  represented  by  the  last  million  ihat  a  Rothschild  adds 
to  his  accumulations.  "The  ascetic  millionaires  of 
Europe!"  wrote  Ferdinand  Lassalle.  "Like  Indian  peni- 
tents or  pillar  saints  they  stand  on  one  leg,  each  on  his 
column,  with  straining  arms  and  pendulous  l^ody  and 
pallid  looks,  holding  a  plate  toward  the  people  to  collect 


52  THE  PRODUCTION'  OF  WEALTH 

the  wages  of  their  Abstinence.  In  their  midst,  towering 
up  above  all  his  fellows,  as  head  penitent  and  ascetic, 
the  Baron  Rothschild!" 

But,  as  here  used,  the  word  "abstinence"  signifies 
nothing  more  than  abstaining  from  present  enjoyments 

The  meaning  m  order  to  secure  some  future  end.  It  does 
of  abstinence,  j^^^  ^^^^^^  ^^^^  ^  ^.-^j^  ^^^  ^^^  ^^  ^.^^  abstemi- 
ously in  order  to  accumulate  large  amounts  of  capital; 
it  does  mean  that  he  refrains  from  erecting  a  new  palace 
or  purchasing  a  new  yacht  or  indulging  in  some  present 
enjoyment,  whenever  he  invests  a  part  of  his  income  in  a 
productive  enterprise.  The  shallowness  of  Lassalle's 
witticism  becomes  apparent,  in  any  case,  when  we  reflect 
that  millionaires  do  not  supply  all  the  capital  that  is  needed 
to  keep  industry  in  motion,  and  that  a  considerable  part 
comes  from  people  of  the  middle  class  and  even  from 
those  in  still  humbler  circumstances.  For  thousands 
of  persons  who  accumulate  capital,  saving  does  mean 
plain  or  even  abstemious  Hving;  still,  this  is  not  what 
our  word  "  abstinence  "  primarily  implies. 

A  nation's  stock  of  productive  capital  can  be  mam- 
tained  only  by  constant  investment;  raw  materials  are 
Capital  quickly  exhausted,   tools  and  machines  wear 

maintained  ^    •       ^i.  r    .  •  r      .      •  i         -i 

by  constant  o^t  m  the  coursc  of  tmie,  factories  and  rail- 
investment.  j-oads  demand  continual  repairs.  A  con- 
siderable part  of  the  gross  product  of  industry  needs  to 
be  devoted  to  the  replacement  of  capital  that  has  dis- 
appeared during  the  year ;  and  if  this  replacement  should 
be  neglected  even  for  a  twelvemonth,  the  productivity  of 
labor  would  be  enormously  reduced.  It  is  evident,  there- 
fore, that  capital  must  be  regarded  not  as  a  fixed  quantum 


THE  FACTORS  OF  PRODUCTION  53 

of  wealth ;  but  rather  as  a  fund  continually  changing  and 
maintained  only  by  the  constant  accession  of  new  pro- 
ducer's goods. 

Since  saving  requires  abstinence,  or  the  sacrifice  of  the 
present  to  the  future,  it  is  obvious  that  the  amount  of 
capital  thai  is  brought  into  existence  will  vary  The 

.  ^r         1  1  inducements 

accordmg  to  the  maucements  offered  to  those  to  saving, 
who  give  the  preference  to  future  goods.  Security  of 
in\ested  capital  is  the  first  and  most  important  induce- 
ment to  saving,  while  insecurity  always  proves  the  most 
effective  deterrent.  A  fair  rate  of  interest  on  investments 
is  a  second  stimulus,  although  it  cannot  be  shown  that 
an  exceedingly  low  rate  would  stop  all  accumulation.  A 
third  inducement  is  the  desire  to  provide  for  one's  old 
age  or  the  comfort  and  integr'ty  of  one's  family.  Others, 
doubtless,  can  be  enumerated,  but  the  principal  forces 
that  favor  the  grr  wth  of  capital  are  those  which  have  been 
mentioned. 

The  nine.ccnth  century  witnessed  a  marked  develop- 
ment of  savings  institutions  and  other  facilities  for  the 
investment   of   capital.     Between    1820   and  Facilities  for 

,  1  f    1  •  •        1  •  saving  and 

1 9 1 7  the  number  of  depositors  in  the  savings  investment, 
banks  of  the  United  States  rose  from  8635  to  11,367,013  ; 
and  their  savings,  increasing  in  similar  proportion,  aggre- 
gated $5,418,000,000  in  the  latter  year.  These  institu- 
tions are  particularly  important  since  they  accept  deposits 
of  small  sums  which  could  not  otherwise  find  j)rofitable 
investment.  The  growth  of  trust  companies  during  the 
last  generation  has  afforded  another  agency  for  the  safe 
investment  of  funds,  the  deposits  of  these  institutions  hav- 
ing increased  from  $85,025,000  in  1875  ^^  S5, 803, 300,000 


54  THE  PRODUCTION  OF  WEALTH 

in  1 91 7.  Life  insurance  companies  have  stimulated 
greatly  the  growth  of  capital,  since  the  annual  premiums 
which  they  collect  from  millions  of  pohcy  holders  represent 
money  which  in  many  cases  would  have  been  spent  and 
not  converted  into  capital.  Of  course  the  companies  are 
obhged  to  disburse  a  considerable  part  of  their  incomes 
for  death  losses  and  running  expenses;  but  they  accumu- 
late large  amounts  of  capital,  nevertheless,  for  the  purpose 
of  meeting  future  Habihties.  At  the  present  time  the 
gross  assets  of  the  leading  life  insurance  companies  of 
the  country  exceed  $5,536,600,000. 

FOR  SUPPLEMENTARY  STUDY 

General:   Hadley,  Economics,  26-63;  Marshall,  Economics,  213 
318;  Nicholson,  Political  Economy,  I,  32-47,  66-103,  i75~2i6; 
Taussig,  Principles  of  Economics,  Bk.  I. 

The  History  of  Productive  Industry:  Bullock,  Introduction  to 
Economics,  11-77;  Cheyney,  Industrial  History  of  England, 
199-239;   Seager,  Introduction  to  Economics,  1-45. 

Nature  as  a  Factor  of  Production :  Adams.  Commercial  Geography, 
1-138;  Mavo-Smith,  Statistics  and  Economics,  111-154, 
Shaler,  Nature  and  Man  in  the  United  States,  208-283. 

Man  as  a  Factor  of  Production  :  Malthus,  Essay  on  the  Principle 
of  Population ;  Mayo-Smith,  Statistics  and  Sociology,  65-92, 
128-153,  314-340,  Statistics  and  Economics,  55-110. 

Capital  as  a  Factor  of  Production :  Hamilton,  Saving  and  Savings 
Institutions;  Mayo-Smith,  Statistics  and  Economics,  155-192. 

QUESTIONS 

1.  If  the  accumulation  of  capital  did  not  involve  the  sacrifice 
of  the  present  to  the  future,  would  any  one  be  willing  to  pay 
interest  for  a'loan  of  capital  ?        . 

2.  Why  should  land  be  excluded  from  the  category  of  capital? 
.     3.   What  is  meant  by  the  statement  that  capital  is  productive  ? 


CHAPTER  IV 

THE   ORGANIZATION   OF    PRODUCTI\'E   INDUSTRY 

I.  The  Organization  of  the  Factors  of  Production 

§  30.  In  our  introductory  chapter  it  was  explainea 
that  the  production  of  wealth  is  a  social  process,  because 
it   involves   the   constant   cooperation,  of  men 

'■  _      Production 

who  are  bound  together  in  complex  economic  asocial 
relations.     The  full  extent  and  significance  of 
this  cooperation  will  be  better  appreciated  after  a  brief 
sur\'ey  of  the  methods  by  which  the  three  factors  of  pro- 
duction are  organized  for  industrial  purposes. 

§  31.  The  division  of  occupations  is  one  form  of  asso- 
ciated effort.  This  occurs  in  a  family  when  the  men 
attend  to  the  outdoor  work  and  the  women  Division  of 
to  the  care  of  the  house.  Or,  upon  a  far  wider  occupations, 
scale,  it  takes  place  within  a  community  when  persons 
begin  to  devote  themselves  exclusively  to  a  single  trade, 
such  as  that  of  the  smith,  the  shoemaker,  or  the 
carpenter. 

§  32.   A  still  more  complex  form  of  cooperative  produc- 
tion is  seen  in  what  is  called  technically  the  division  of 
labor.     By  this  is  meant  the  division  of  the  Division 
process  of  producing  a  commodity  into  a  num-  °*'^*'°''- 
ber  of  different  parts,  by  which  each  laborer  is  given  bu! 
vne  or  two  simple  operations  to  perform.     In  this  manner, 

55 


56       ORGANIZATION  OF  PRODUCTIVE  INDUSTRY 

for  instance,  the  manufacture  of  a  shoe  has  been  sub- 
divided into  122  operations  requiring  the  services  of  113 
different  laborers.  So  far,  indeed,  has  the  division  of 
labor  been  carried  in  a  modern  factory  that  every  reader 
is  able  to  supply  many  illustrations  of  this  minute  sub- 
division of  the  work  of  production. 

The  advantages  of  the  division  of  labor  were  recognized 
by  Xenophon,  who  wrote,  about  362  B.C.:  "In  small 
Its  cities  the  man  who  makes  beds  may  make 

advantages.  (jQors,  plows,  tables,  and  perhaps  houses; 
he  is  glad  if,  even  so,  he  can  find  customers  enough  to 
provide  a  hving;  and  it  is  plainly  impossible  that  a  man 
practising  many  crafts  should  be  good  at  them  all.  But 
in  great  cities,  because  there  is  a  large  demand  for  each 
article,  a  single  craft  is  enough  for  a  living,  or  sometimes, 
indeed,  no  more  than  a  single  branch  of  a  craft.  We  find 
one  man  making  m.en's  boots  only ;  and  another,  women's 
only ;  one  man  hves  by  cutting  out  garments,  another  by 
fitting  together  the  pieces.  The  smaller  the  work,  the 
greater  the  skill  in  the  craftsman."  Better  known,  how- 
ever, is  Adam  Smith's  discussion  of  this  subject,  which 
has  become  classical.  Smith  showed  that  "the  division  of 
labor,  by  reducing  every  man's  business  to  some  one 
simple  operation,  .  .  .  necessarily  increases  very  much  the 
dexterity  of  the  workman."  Then  he  pointed  out  that, 
since  "a  man  commonly  saunters  a  httle  in  turning  his 
hand  from  one  sort  of  employment  to  another,"  a  con- 
siderable amount  of  time  is  saved  when  a  person  confines 
himself  to  a  single  kind  of  labor.  And,  finally,  he  observed 
that  the  division  of  labor  reduces  production  to  a  series 
of  comparacively  simple  processes  which  can  easily  be 


ORGAmZATION-  OF  FACTORS  OF  PRODUCTTOIV     5; 

Studied,  and  the  more  readily  improved  by  inventions. 
The  hst  of  advantages  has  been  elaborated  by  subsequent 
writers,  but  the  root  of  the  matter  may  be  found  in  Smith's 
discussion  —  and,  indeed,  in  that  of  Xenophon. 

We  should  not,  however,  overlook  the  fact  that  certain 
disadvantages  attend  the  division  of  labor.  The  work- 
man who  is  confined  to  a  single  process  often  Disadvan- 
finds  his  duties  exceedingly  monotonous;  and,  ^iffs^io^^ ^f ® 
unless  he  cultivates  other  interests,  his  facul-  ^^''°''- 
ties  become  narrowed,  while  his  intelligence  dechnes. 
Again,  men  who  have  devoted  their  hves  to  a  few  routine 
forms  of  labor  do  not  easily  find  other  work  if  a  distur- 
bance in  industr)^  throws  them  out  of  their  accustomed 
employments.  Finally,  the  division  of  labor  has  led  to 
the  employment  of  women  and  children  in  many  kinds 
of  manufacturing  industry,  since  little  muscular  strength 
is  needed  to  operate  some  kinds  of  machinery.  The 
textile  industries  in  particular  offer  a  large  field  for  the 
utilization  of  such  labor;  and  in  1900  our  cotton,  woolen, 
and  silk  mills  employed,  for  ever\'  45  men,  no  less  than  55 
women  and  children.  Yet,  when  all  is  said,  the  division 
of  labor  has  been  an  indispensable  condition  for  the  devel- 
opment of  modern  industry;  and  a  wise  pohcy  will  seek 
to  retain  its  advantages  while  remedying  the  incidental 
evils  that  may  result  from  it.  Opportunities  for  education 
and  recreation  will  counteract  the  monotony  occasioned 
by  confinement  to  a  single  operation,  while  the  employ- 
ment of  women  and  children  may  be  restricted  in  all 
cases  where  the  health  of  the  workers  or  the  welfare  of 
the  family  demands  such  action. 

§  33.    Underlying  the  division  of  Kbor  is  another  coop- 


58        ORGANIZATION  OF  PRODUCTIVE  INDUSTRY 

erative   process,  —  the   exchange   of   products.     Without 

the  opportunity  to  exchange  their  wares,  the  shoemaker, 

carpenter,  smith,  and  farmer  could  not  devote 

Exchange. 

themselves  exclusively  to  their  respective  occu- 
pations. By  means  of  an  organized  system  of  markets 
merchants  provide  a  vent  for  the  products  of  all  indus- 
tries, and  supply  producers  with  whatever  goods  they 
may  desire  to  obtain  in  exchange  for  their  own  commodi- 
ties. In  fact  the  extent  to  which  labor  can  be  subdivided 
depends  upon  the  quantity  of  the  particular  product 
which  the  market  can  absorb;  obviously  if  there  is  a 
demand  for  only  loo  pairs  of  shoes  each  year,  it  will  not 
pay  to  adopt  methods  that  enable  the  producers  to  turn 
out  looo  pairs.  This  was  perceived  by  Xenophon  when 
he  said:  "But  in  great  cities,  because  there  is  a  large 
demand  for  each  article,  a  single  craft  is  enough  for  a 
Hving,  or  sometimes,  indeed,  no  more  than  a  single  branch 
of  a  craft."  And,  in  the  "Wealth  of  Nations,"  Adam 
Smith  enunciated  the  principle  that  the  division  of  labor 
is  "limited  by  the  extent  of  the  market." 

§  34.  A  fourth  form  of  association  in  industry  is  found  in 
the  cooperation  of  the  three  factors  of  production ;  for  it  is 
„  ..  necessary  that  the  persons  who  control  the  sup- 

Cooperation  . 

of  the  factors  plies  of  land,  capital,  and  labor  should  combine 

of  production.     .  ^  ^^   ^  r  1         •  1  1  . 

m  the  establishment  of  business  undertakings. 
Sometimes  it  happens  that  one  man  may  own  both  land 
and  capital,  and  do  all  the  work  that  is  required.  This 
is  the  simplest  possible  way  to  secure  the  cooperation  of 
the  three  factors,  and  is  a  common  method  in  American 
agriculture,  where  so  many  farmers  cultivate  their  own 
land  with  their  own  labor  and  capital. 


ORGAmZATION  OF  FACTORS  OF  PRODUCTIOiY       59 

But  whenever  different  classes  of  persons  control  the 
supplies  of  land,  labor,  and  capital,  a  more  complex  form 
of  organization  is  necessary.  The  function  ^he 
of  securing  the  cooperation  of  landlords,  ^"^^i-epi-eneur. 
laborers,  and  capitalists  has  fallen  to  a  distinct  class  of 
persons,  known  as  emplo}-crs  or  undertakers  ^  or  entre- 
preneurs. Under  modern  conditions  this  position  has 
become  exceedingly  important;  entrepreneurs  are  con- 
stantly seeking  favorable  opportunities  for  establishing 
business  enterprises,  and  upon  the  good  judgment  which 
they  show  in  locating  and  organizing  an  industry  its 
subsequent  success  in  large  measure  depends.  Very 
often  the  entrepreneur  contributes  a  part  of  the  capital 
'nvestcd  in  a  new  undertaking,  and  he  may  even  labor 
with  his  own  hands;  but  when  he  does  either  of  these 
things,  he  is  acting  as  a  j^apitalist  or  laborer;  his  function 
as  entrepreneur  is  wholly  distinct  from  any  additional 
functions  he  may  choose  to  assume  as  landlord,  capitalist, 
or  laborer. 

Entrepreneurs  may  secure  the  cooperation  of  land, 
labor,  and  capital  bv  any  one  of  the  following 

'  '  '  •'  '^    Forms  of 

methods  :  —  business 

(i)    The  single  entrepreneur  system,  in  which 

an  employer,  contributing  all  of  the  land  and  capital, 
or  hiring  a  part,  and  collecting  the  requisite  number 
of  laborers,  establishes  and  conducts  a  business  upon 
his  individual  responsibility. 

'  Undertaker  Is  the  older  English  word  for  a  person  who  establishes 
and  conducts  a  business  undcrtaki  ig.  Thus  Adam  Smith  speaks  of  an 
undertaker  employing  "  manufacturers."  Since  the  word  is  now  commonly 
applied  fo"  sinirk  line  of  business,  the  equivalent  French  wonl, en/refirenew*^ 
has  corcc  mio  ust. 


60       ORGANIZATION-  OF  PRODUCTIVE  INDUSTRY 

(2)  Next  comes  the  o^-^'-'^ry  business  partnership.  In 
this,  two  or  more  men  u_.ice  in  supplying  the  capital 
and  assuming  the  risk  of  management.  This  form 
of  undertaking  is  advantageous  when  the  business 
requires  more  capital  than  any  one  partner  could 
supply,  or  when  the  cares  of  management  need  to  be 
divided.  The  partners  agree  to  share  profits  or 
losses  in  certain  proportions,  and  are  jointly  and 
severally  liable  to  their  creditors  for  all  the  debts  of 
the  firm  to  the  full  extent  of  their  fortunes. 

(3)  A  third  form  of  undertaking  is  the  business  corpora- 
tion. This  is  now  of  such  exceedingly  great  impor- 
tance that  it  will  require  detailed  treatment  in  the 
second  part  of  our  chapter. 

(4)  Cooperative  production  is  the  next  form  of  under- 
taking. In  this,  a  number  of  laborers  combine  to 
estabhsh  an  enterprise  and  to  conduct  it  upon  their 
own  responsibility,  dispensing  with  the  services  of 
the  entrepreneur.  The  strength  and  weakness  of 
such  enterprises  will  be  considered  in  a  subsequent 
chapter. 

(5)  Another  sort  of  undertaking  is  the  management  of 
business  by  a  government.  The  post  office  is  usually 
conducted  in  this  way,  and  water  works  or  gas  and 
electric  plants  may  be  managed  in  this  manner. 
This,  again,  brings  up  a  subject  that  will  be  dis- 
cussed elsewhere. 

II.  Business  Corporations 

§  35.    For  our  discussion  a  corporation  may  be  defined 
as  a  number  of  persons  who  are  empowered  by  law  to  act 


BUS/ATESS  CORPORATIONS  6 1 

as  an  individual  for  certain  purposes  defined  by  a  charter. 
Such  a  body  corporate  is  given  the  power  of  providing  for 
a  succession  of  new  members  upon  the  death 

^  Growth  of 

or  retirement  of  the  old ;  and  thus  is  authorized  business 

.    ,    .  ...  -  .     ,    corporations. 

to  mamtam  a  contmued  existence  for  a  period 
of  years,  or,  more  commonly,  in  perpetuity.  A  church, 
a  university,  or  a  charitable  institution  can  be  most  con- 
veniently organized  in  this  way;  and  until  the  nineteenth 
century,  such  eleemosynary  organizations,  together  with 
a  considerable  number  of  chartered  municipalities,  formed 
the  vast  majority  of  all  the  corporations  in  existence.  The 
nineteenth  centur}^  however,  witnessed  an  enormous  in- 
crease of  corporations  formed  for  business  purposes ;  and, 
at  the  present  day,  all  large  enterprises,  as  a  mere  matter 
of  course,  assume  corporate  form.  In  the  United  States 
the  census  of  1910  showed  that  nearly  eighty  per  cent  of 
the  product  of  our  manufacturing  industries  came  from 
incorporated  companies.  When  it  is  remembered  that 
all  our  railways  are  owned  and  operated  by  corporations, 
and  that  mining  industries  are  usually  conducted  in  the 
same  manner,  it  will  be  evident  that  a  very  large  share  of 
the  business  of  the  country  has  passed  into  corporate 
control. 

§  36.  The  charter  of  a  corporation  authorizes  the  mem- 
bers to  act  as  a  single  person  through  such  ofticcrs  or 
other  agents  as  they  shall  appoint  to  represent  them. 
They  may  acquire  or  sell  property,  may  con-  The  powers  of 
duct  manufacturing  or  commercial  enterprises,  « corporation. 
and  may  sue  and  be  sued.  The  powers  of  a  corporation 
are  fixed  by  its  charter;  anrl  beyond  the  limits  thus  defined, 
it  cannot  lawfully  proceed.     Any  action  that  exceeds  the 


62      ORGANIZATION  OF  PRODUCTIVE  INDUSTRY 

powers  conferred  by  the  charter  would  be  pronouijced 
by  the  courts  ultra  vires,  i.e.,  beyond  the  powers  of  the 
corporation;  and  in  extreme  cases  such  action  might 
lead  to  a  forfeiture  of  the  charter.  Under  the  lax  laws  of 
some  of  our  states,  however,  corporations  may  secure 
power  to  do  almost  anything  under  the  hght  of  the  sun; 
so  that  in  such  cases  the  doctrine  of  ultra  vires  has  Httle 
more  than  academic  interest.^  Until  shortly  before  the 
middle  of  the  nineteenth  century  it  was  necessary  to  apply 
to  a  state  legislature  for  a  special  charter  for  every  cor- 
porate enterprise  that  was  established.  Sometimes  char- 
ters were  granted  only  to  members  of  the  party  in  power, 
or  could  be  procured  only  by  bribing  members  of  the  legis- 
lature ;  so  that  at  last  it  became  desirable  to  enact  general 
laws  under  which  any  body  of  persons  could,  by  comply- 
ing with  certain  reasonable  conditions,  secure  the  privilege 
of  incorporation.  At  the  present  time  some  of  our  states 
allow  corporations  to  be  formed  only  under  general  acts 
of  this  character,  while  everywhere  the  tendency  is  to 
restrict  the  granting  of  special  charters. 

§  37.  A  business  corporation  has  a  capital  stock  which 
is  divided  into  shares,  usually  of  $100  each.  When  a  com- 
pany is  formed,  the  laws  of  most  states  allow  these  shares 
to  be  issued  to  the  original  subscribers   upon  any  con- 

^  Here  are  some  of  the  provisions  of  the  charter  of  a  lumber  company 
organized  in  New  Jersey.  The  company  is  given  power  "  to  acquire 
and  improve  timber,  farming,  grazing,  mineral,  and  other  lands" ;  to 
"manufacture  lumber,  iron,  steel,  manganese,  coke,  copper,  and  other 
materials''^ ;  to  construct  and  operate  railways,  canals,  "  and  any  other 
means  of  transportation" ;  and  "to  engage  in  any  other  manufacturing, 
mining,  constructive,  or  transportation  business  of  any  kind  or  character 
tohaisoever.** 


BUSIIVESS  CORPORATIONS  6l 

ditions  that  the  promoters  of  the  enterprise  establish  i 
ahhough  stricter  regulations  are  imposed  by  federal  laws 
upon  national  banks,  and  by  some  states  upon 

^  '  •'  _  ^  Common  and 

pubhc- service  companies.  Thus  a  capital  stock  preferred 
of  $1,000,000  may  represent  the  payment  of 
$1,000,000  in  cash,  or  property  taken  at  a  fair  valua- 
tion; or  it  may  represent  a  payment  of  $1000  by  the 
original  subscribers,  in  which  case  $999,000  of  the 
capitahzation  is  usually  described  as  "water."  Stock 
may  be  common  or  preferred;  the  latter  being  entitled 
to  a  certain  annual  rate  of  dividend,  say  six  per  cent, 
before  anything  can  be  paid  to  the  holders  of  the  com- 
mon stock. 

Many  corporations  raise  a  considerable  part  of  their 
capital  by  issuing  obligations  known  as  bonds.  Legally 
a  corporation  bond  is  a  debt  of  the  company  corporation 
that  issues  it,  and  calls  for  the  annual  payment  ^°°'^®- 
of  a  fixed  rate  of  interest  as  well  as  for  the  repayment  of 
the  principal  at  the  expiration  of  a  certain  term  of  years. 
In  a  majority  of  cases  the  payment  of  Ijolh  interest  and 
principal  is  secured  by  executing  a  mortgage  upon  the 
jjropcrty  of  the  corporation  for  the  benefit  of  the  bond 
holders,  and  securities  thus  issued  are  termed  mortgage 
Ijonds.  In  such  cases  the  failure  to  pay  either  interest  or 
principal  gives  the  bondholders  the  right  to  seize  and  sell 
the  mortgaged  property  in  order  to  satisfy  their  claims; 
but  in  practice  it  is  not  always  feasible  to  carry  out  a  fore- 
closure sale,  so  that  some  sort  of  com])romise  is  often 
effected.  From  the  economic  point  of  view  the  bonded 
debt  of  many  corporations  is  not  to  be  considered  as  a 
true  debt,  but  rather  as  a  permanent  investment  of  capital 


64       ORGANIZATION  OF  PRODUCTIVE  INDUSTRY 

by  the  bondholders.  A  railroad  costing  $2,000,000  to  con- 
struct, and  earning  $120,000  net  income  a  year,  would  be 
ible  to  pay  six  per  cent  dividends  upon  $2,000,000  of 
stock.  If,  now,  the  promoters  issue  stock  only  to  the 
amount  of  $1,000,000,  and  raise  the  rest  of  the  capital  by 
selling  $1,000,000  of  four  per  cent  bonds,  the  company 
"vvill  be  able  to  pay  the  $40,000  annual  interest  on  the  bonds 
and  then  have  $80,000  available  for  dividends  on  the  stock. 
By  raising  one  half  of  their  capital  by  means  of  a  bond 
Issue,  the  stockholders  in  this  company  can  receive  an 
eight  per  cent  dividend  in  place  of  the  six  per  cent  that 
would  have  been  secured  if  all  the  capital  had  been  raised 
by  means  of  stock.  The  railroads  of  the  United  States 
in  1910  had  outstanding  $8,113,657,000  of  stock  and 
$10,303,474,000  of  bonds  and  other  obligations.  While 
eome  of  this  indebtedness  will  ultimately  be  paid,  the 
greater  part  will  never  be  retired ;  and  it  must  be  consid- 
ered as  a  permanent  part  of  the  capital  which  the  country 
has  invested  in  its  railway  system. 

§  38.  In  almost  all  of  the  states  the  stockholders  of  a 
corporation  are  not  liable  for  the  debts  of  the  enterprise.^ 
Limited  -'■^  ^ase  of  insolvency  the  stockholders  may  lose, 

liability,  q£  course,  all  that  they  have  invested  when  the 
property  of  the  corporation  is  seized  in  order  to  satisfy  the 
demands  of  its  creditors;  but  their  liabihty  extends  no 
farther,  so  that  their  position  is  vastly  more  favorable  than 
that   of  the   members   of  a  business   partnership.     The 

^  Some  exceptions  are  made.  A  number  of  states  make  stockholders 
liable  for  wages  due  to  employees  ;  or  when  part  of  the  capital  has  been 
refunded  to  stockholders  ;  or  for  any  sums  remaining  unpaid  on  the  shares 
owned. 


BUSINESS  CORPORATIONS  65 

English  Parliament  and  the  legislatures  of  many  of  the 
American  states  were  slow  to  adopt  this  poHcy  of  hmitipg 
the  liability  of  stockholders;  but,  during  the  last  half  of 
the  nineteenth  centur}',  such  a  course  was  practically 
forced  upon  them.  For  under  modem  conditions  vast 
sums  of  capital  are  needed  for  the  prosecution  of  large 
enterprises,  and  the  funds  could  not  be  obtained  without 
the  grant  of  a  hmited  Habihty.  Many  men  may  be  glad 
to  risk  small  or  moderate  sums  in  a  new  and  untried  en- 
terprise, when  no  one  would  invest  a  penny  if  such  action 
obhged  him  to  jeopardize  his  entire  fortune.  More- 
over, the  limitation  was  defensible  upon  grounds  of  equity, 
because  the  average  stockholder  in  a  large  corporation  has 
little  influence  upon  the  conduct  of  its  affairs,  and  fre- 
quently knows  Httle  about  them;  in  fact  the  person  who 
extends  credit  to  a  company  is  usually  in  a  better  position 
to  judge  of  its  solvency.  Such  considerations  do  not  apply 
to  a  small  corporation  in  which  a  few  persons,  perhaps 
members  of  one  family,  own  all  of  the  stock;  but  in 
raising  the  capital  needed  for  building  railroads,  equip- 
ping giant  factories,  and  operating  huge  steamships, 
limitation  of  the  stockholders'  liability  is  both  just  and 
expedient. 

§  39.  Besides  making  it  possible  to  raise  the  large 
capitals  demanded  by  the  conditions  of  modern  industry, 
the  business  corporation  has  the  advantage  of   .^ 

'  "  Advantages 

rendering  the  life  of  an  enterprise  independent  of  corporate 

e  ^  •  •  1        t       1        f  11    organization. 

of  such  contmgencies  as  the  death  01  any  or  all 
of  its  members.     With  a  partnership,  the  affairs  of  the 
firm  have  to  be  readjusted  every  time  that  one  of  the  part- 
ners dies;    and  there  are  comparatively  few  such  enter- 


66       ORGANIZATION-  OF  PRODUCTIVE  INDUSTRY 

prises  that  survive  the  death  of  the  last  of  the  original 
members.  The  existence  of  an  incorporated  company, 
however,  is  in  no  way  involved  in  the  death  of  a  stockholder 
even  though  its  prosperity  mry  be  affected  by  the  loss  of 
one  who  had  been  its  ablest  leader.  Since  such  a  concern 
as  a  railroad  ought  always  to  be  managed  with  an  eye  to 
the  distant  future,  it  is  highly  desirable  to  have  it  con- 
trolled by  a  company  that  can  count  upon  a  perpetual 
existence. 

It  has  proved  advantageous  to  have  the  ownership  of 
our  largest  industrial  enterprises  divided  up  into  the 
The  stock  thousands  of  small  shares  represented  by  the 
exchanges.  stocks.  Not  only  does  this  arrangement  afford 
good  opportunities  for  small  investments,  if  the  companies 
are  honestly  conducted,  but  it  makes  it  possible  to  deter- 
mine at  any  moment  the  value  of  a  man's  holdings,  whether 
large  or  small.  For  the  securities  of  the  leading  corpo- 
rations are  bought  and  sold  in  the  public  stock  exchanges 
by  a  large  number  of  professional  dealers  who  make  it 
their  business  to  study  these  securities  and  to  ascertain 
their  value.  By  looking  at  the  quotations  which  the 
morning  paper  brings  him  in  its  stock  market  columns, 
an  investor  can  tell  at  a  glance  the  money  value  of  his 
holdings,  and  can  either  increase  or  dispose  of  his  shares 
by  merely  telephoning  to  his  broker.  Speculation  in  the 
stock  market  has  its  undesirable  features,  of  course,  and 
is  responsible  for  a  great  many  evils  which  are  too  well 
known  to  require  discussion;  but  the  utiHty  of  the  stock 
market  in  facilitating  the  valuation  and  transfer  of  cor- 
poration securities  is  so  great  that  business  could  not  be 
conducted  without  it. 


BUSmSSS  CORPORATION 


67 


§  40.  Some  knowledge  of  the  elements  of  corporation 
accounting  is  absolutely  indispensable  for  the  student  of 
modern  industry,  and  the  subject  can  be  best  corporation 
approached  by  a  study  of  what  are  kno\Mi  as  accounting, 
the  income  account  and  the  balance  sheet.  The  income 
account  presents  a  statement  of  the  earnings  and  expendi- 
tures of  a  company  for  a  certain  period,  such  as  a  quarter, 
or  a  year;  and  is  sufficiently  illustrated  by  the  following 
statement  of  a  railroad  which,  in  1903,  operated  some  400 
miles  of  line :  — 


Earnings 


Passenger 
Freight    . 
Mail  and  express 
Miscellaneous 


$771,905 

1,229.761 

100.798 

191,842 


$2,294,306 


Expenses 

Maintenance  of  track 

and  structures 

$264,091 

Maintenance    of    cars 

and  locomotives  . 

177.368 

Operating  trains 

850.543 

Taxes 

67.548 

Miscellaneous          . 

79.290 

$1,438,840 


Summary :  Net  earnings,  $855,466.  Paid  for  rent  of  leased  lines, 
$19,000;  for  interest  on  bonded  debt.  $540,052;  on  sinl<ing  fund, 
$33,000;  for  dividends,  $261,728.  Total  payments  from  net  earn- 
ings, $853,780;  surplus  for  year,  carried  to  profit  and  loss,  $1686. 

A  balance  sheet  is  intended  to  give  a  complete  state- 
ment of  the  resources  and  liabilities  of  a  company  on  a 
given  date,  as  upon  December  31  of  any  year.  The  balance 
If  honestly  and  accurately  computed,  it  enables  ^**^®*" 
stockholders,  investors,  and  creditors  to  judge  of  the  sol- 
vency of  the  company.  For  the  railroad  to  which  wc  have 
already  referred,  the  Ijalancc  sheet  for  19(3  disclosed  the 
following  facts:  — 


68       ORGANIZATION  OF  PRODUCTIVE  INDUSTRY 


Liabilities 

Resources 

Common     and 

pre- 

Cost    of    road     and 

ferred  stock 

.     $9,257,000 

equipment          .     $1 

8,679,549 

Funded  debt    . 

.     11,162,000 

Investments    (stocks 

Accounts    and 

bills 

of  other  roads)  . 

1,285,792 

payable 

732,218 

Accounts    and     bills 

Profit  and  loss 

756,102 

receivable 

438,545 

Materials  and  supplies 

283,540 

Improvement  fund 

809,424 

Cash 

410,470 

$21,907,320 

1,907.320 

A  number  of  these  items  require  some  explanation.     It 

will  be  noted  that  the  capital  stock  of  the  roa.d  is  placed 

.    ^.       among  its  Habihties.     This  is  done  in  order  to 

Examination  " 

of  the  account  for  the  money  which  the  stockholders 

liabilities.  .  i     •         1  ... 

have  invested  m  the  property;  against  this 
stock  and  the  bonded  debt,  the  company  has  a  railroad 
costing  $18,679,549  and  some  other  things,  all  of  which 
appear  among  the  resources.  The  third  item  in  the  lia- 
bihties  requires  little  comment;  it  represents  wages  due 
to  laborers,  accounts  due  to  dealers  in  supplies,  and  small 
loans  secured  from  banks.  The  item  "profit  and  loss" 
represents  surpluses  from  the  earnings  of  previous  years 
which  have  been  invested  in  the  property  instead  of  being 
paid  out  to  stockholders  in  the  form  of  dividends.-* 
Such  surpluses  represent  an  additional  investment  by  the 
stockholders,  and  need  to  be  charged  up  against  the  enter- 
prise, like  the  capital  stock.  All  together  the  balance  sheet 
shows  that  $20,419,000  raised  by  issuing  stock  and  bonds, 

^  If  the  net  result  of  the  operations  of  the  road  up  to  date  had  been  a 
deficit,  the  item  "profit  and  loss  "  would  appear  among  the  assets,  in  ordel 
to  balance  the  accounts. 


BUSLVESS  CORPORATION'S  69 

$756,102  saved  out  of  the  profits  of  previous  years,^  and 
credits  for  $732,218  now  due  to  various  persons,  have  been 
invested  in  the  property  owned  by  the  company. 

Against  these  Habilities  what  has  the  railroad  to  show? 
In  the  first  place  818,679,549  has  been  expended  in  con- 
structing   and    equipping    the    road;     while 

o  n     rr     ft  >  Examination 

$1,285,000  has  been  invested  in  the  stocks  of  of  the 

resources 

other  companies  which  it  was  desirable  to  con- 
trol in  order  to  secure  the  traffic  which  they  could  supply 
at  various  junction  points.^  Then  the  company  has  on 
hand  $283,540  of  coal  and  other  supplies  and  $410,470 
of  cash,  which  account  for  a  corresponding  amount  of 
the  habihties.  Moreover,  $438,545  of  debts  are  due  to 
the  company  from  connecting  hnes  and  other  concerns; 
while  $809,424  of  money,  raised  by  a  recent  issue  of  bonds, 
is  on  deposit  in  a  bank,  awaiting  the  time  not  far  distant 
when  it  will  be  needed  to  pay  for  improvements  that  are 
now  under  way.  The  sum  of  these  resources,  of  course, 
exactly  equals  the  liabilities;  and  this  side  of  the  balance 
sheet  shows  precisely  what  the  company  has  done  with 
the  capital  invested  in  it. 

§  41.   While  the  growth  of  corporations  has  been,  upon 
the  whole,  eminently  beneficial  in  its  influence  upon  mod- 
em industn,',  we  should  not  overlook  the  dark  specuiatfro 
side  of  our  picture.     In  nearly  all  countries,  but  ?'<""<'*''"'■ 
most  of  all  in  the  United  States,  lax  laws  and  a  low  stand- 
ard of  business  morality  have  enabled  serious  evils  to  creep 

1  It  will  be  remembered  that  the  income  account  for  1903  showed  that 
$1686  had  Dean  carried  to  profit  and  loss. 

'^  From  these  stocks,  dividends  of  some  S6o,ooo  were  jccured.  which,  iti 
the  income  account,  are  included  in  the  miscdlanecrus  earningv 


70       ORGANIZATION  OF  PRODUCTIVE  INDUSTRY 

into  corporation  management.  Of  these  the  most  obvious  has 
been  the  promotion  of  companies  for  purely  speculative  pur- 
poses. In  times  of  great  prosperity  corporation  promoters^ 
have  too  frequently  duped  the  pubHc  into  buying  the  shares 
of  worthless  companies,  and  have  made  large  fortunes  by 
floating  numbers  of  enterprises  that  could  have  no  reason- 
able prospect  of  success.  This  sort  of  thing  began  early 
in  the  seventeenth  century  with  the  Mississippi  Company 
in  France  and  the  South  Sea  Company  in  England;  and 
it  has  continued  ever  since,  the  closing  years  of  the  nine- 
teenth century  and  opening  years  of  the  twentieth  wit- 
nessing the  most  unprecedented  outbreak  of  speculative 
promoting  in  the  history  of  the  United  States.  This  evil 
will  not  be  entirely  removed  so  long  as  the  laws  of  New 
Jersey  and  some  other  states  make  it  so  easy  to  float  cor- 
porations with  a  maximum  capitahzation  and  a  minimum 
of  substantial  assets^;  but  much  can  be  done  by  the  invest- 
ing pubhc  if  it  will  only  learn  to  discriminate  between 
bubble  companies  and  legitimate  business  enterprises. 
Much  may  be  accomplished  also  by  such  an  administra- 
tion of  our  present  laws  against  obtaining  money  upon 
false  representations  as  will  make  it  unsafe  for  a  promoter 
to  withhold  material  facts  or  publish  false  statements  con- 
cerning the  assets  and  earning  power  of  a  projected 
company. 

A  second  class  of  evils  is  connected  with  the  manage- 
ment of  companies  that  are  carrying  on  legitimate  and 

-  Promoter  is  the  word  commonly  applied  to  the  man  who  conceives 
the  plan  and  carries  through  the  work  of  floating  a  company. 

2  In  one  well-authenticated  case  a  company  owning  property  worth  less 
than  ;^soo,ooo  was  floated  with  a  capitalization  of  $8,000,000. 


BUSINESS   CORPORATIONS  y\ 

profitable  enterprises.  A  corporation  is  controlled  by  a 
board  of  directors  elected  at  an  annual  meeting  of  the 
stockholders  and  intended  to  represent  the  irresponsible 
wishes  of  a  majority  of  the  men  who  own  the  n^anagement 
property.  As  a  matter  of  fact,  wl:i€n  stock  is  owned 
by  thousands  of  small  holders  who  can  adopt  concerted 
action  only  with  great  difficulty,  it  has  been  comparatively 
easy  for  a  few  large  capitalists  to  control  the  annual  meet- 
ings.^ Once  in  control,  a  board  of  directors  has  too  often 
proceeded  to  manage  the  property  for  its  own  personal 
interest,  and  not  for  the  benefit  of  all  the  stockholders. 
Directors  of  railroads  have  formed  construction  companies 
to  build  lines  that  have  then  been  sold  to  their  roads  for 
four  or  five  times  the  actual  cost  of  constructing  them. 
In  this  way  many  railroads  have  been  deliberately  wrecked 
by  the  burden  of  bonded  indebtedness  contracted  in  the 
purchase  of  worthless  branches  or  of  valuable  lines  bought 
at  exorbitant  prices.  Many  of  these  evils  have  been  cor- 
rected, and  railroad  management  is  to-day  on  a  distinctly 
higher  plane  than  it  was  ten  or  twenty  years  ago;  but 
our  standards  of  business  morality  do  not  yet  lead  us  to 
drive  out  of  positions  of  trust  men  who  have  once  abused 
their  power  as  directors  for  ulterior  personal  ends. 

Then,  also,  corporations  afford  too  great  facilities  for 
the  separation  of  ownership  and  management.  In  the 
first  place  holders  of  bonds  are  creditors,  not  members; 

'  Shares  are  (^ften  bought  with  borrowed  m'ney  just  before  the  annual 
meeting,  and  sidd  imiiiediateiy  afterward.  This  is  done,  of  course,  in 
order  to  secure  temporary  control  of  the  votes  which  the  shares  represent. 
Then,  too,  the  directors  are  often  divided  into  classes  so  that  only  one 
third  will  go  out  of  office  each  year.  This  makes  it  more  difficult  for  t 
majority  of  stockholders  to  oust  a  dishonest  board  of  managen. 


72       ORGANIZATION-  OF  PRODUCTIVE  INDUSTRY 

and  therefore  have  no  voice  in  the  management  of  the  com- 
pany. A  railroad  with  $1,000,000  of  common  stock  and 
Separation  $1,000,000  of  bonds  is,  SO  long  as  it  remains 
of  ownership  solvent,  absolutely  in  the  control  of  the  persons 
management,  who  supply  only  One  half  of  the  capital  in- 
vested.-^ Moreover,  one  half  of  these  stockholders  can 
control  the  whole  body ;  so  that  ownership  of  $500,000  se- 
cures absolute  power  over  $2,000,000  of  capital.  In  recent 
years  the  art  of  obtaining  control  with  a  minimum  of  out- 
lay has  been  perfected  by  the  use  of  a  device  known  as  the 
holding  company,  which  is  formed  to  acquire  the  securities 
of  other  corporations.  In  the  case  just  described,  ownership 
of  $500,000  of  capital  carries  control  of  a  $2,000,000 
property;  but  by  means  of  a  holding  company  control 
can  be  secured  still  more  cheaply.  Manifestly,  if  a  holding 
company  with  $500,000  of  capital  purchases  half  the  stock 
of  the  first  corporation,  it  will  become  the  arbiter  of  its 
fortunes;  and  if,  then,  a  few  men  acquire  $250,000  of  the 
stock  of  the  holding  company,  they, will  be  the  masters 
of  both  concerns.  In  this  way  and  in  others,  ambitious 
or  designing  men  are  able  to  wield  a  power  that  is  wholly 
disproportionate  to  their  investments  in  the  corporations 
controlled.  Such  conditions  are  extremely  unfortunate, 
since  directors  who  neither  own  the  property  which  they 
manage  nor  owe  obedience  to  the  men  who  are  the  real 
owners,  wield  an  irresponsible  power  that  encourages  reck- 
lessness and  affords  abundant  opportunities  for  dishonesty. 
In  the  future  reform  of  our  corporation  laws,  care  should 

^  Some  railroads  have  been  built  entirely  out  of  the  proceeds  of  bond 
issues,  the  common  stock  being  wholly  water.  Here  the  roads  ar«  cor' 
trolled  by  men  who  have  invested  practically  nothing. 


BC/SLVESS   CORPORAT/ONS  73 

be  taken  to  check  this  tendency  toward  the  separation  of 
ownership  and  management;  and  the  device  known  as 
the  holding  company  should  be  placed  beyond  the  pale  of 
the  law. 

FOR   SUPPLEMENTARY   STUDY 

General:  Marshall.  Economics.  319-356.  371-392;  Nicholson, 
Political  Economy,  I,  104-121,  131-137  ;  Taussig,  Principles 
of  Economics,  I,  86-96. 

Division  of  Labor:  Thirteenth  Annual  Report  of  the  United  States 
Comniissioner  of  Labor,  ■•  Hand  and  Machine  Labor." 

Business  Corporations :  Greex,  Corporation  Finance ;  Johnsox, 
American  Railway  Transportation,  69-/7. 

Organization  of  American  Industries  :  Twelfth  Census  of  the  United 
States,  Reports  on  Agriculture  and  on  Manufactures.  The 
following  references  are  suggested  as  topics  for  special  reports 
or  essays:  Agriailtural  progress  of  fifty  years  (Rep"t.  Agric, 
I,  pp.  xvi-xxxvi)  ;  Localization  of  the  principal  crops  (Rep't. 
Agric,  II,  plates  1-19)  ;  Present  cojiditioti  of  American  manu- 
factures (Rep't.  Mfgrs.,  I,  pp.  xlvii-lix)  ;  The  leading  manu- 
facturing industries  (Rep't.  Mfgrs.,  I,  pp.  cxliii-cliv)  ;  Power 
employed  in  manufactures  (Rep't.  Mfgrs.,  I,  pp.  cccxv- 
cccxxxv)  ;  Localization  of  industries  (Rep't.  Mfgrs.,  I,  pp. 
cxc-ccxiv)  ;  Studies  of  particular  industries  or  of  industries 
of  one's  own  state  (Rep't.  Mfgrs.:  for  textiles,  III.  pp.  3-16; 
for  clothing.  Ill,  pp.  296-301  ;  for  cotton  ginning;,  III,  pp.  336- 
340;  for  flour,  III",  pp.  369-371;  for  slaughtering  and  meat 
packing,  III,  pp.  412-421  ;  for  dairy  industry,  III,  pp.  437-444; 
for  leather,  III,  \)\>.  730-738;  for  iron  and  steel,  IV,  pp.  3-27; 
for  agricultural  implements,  I\',  358-364). 

QUESTIONS 

1.  What   is  the   relation  of  the  process  of  exchange  to  the 
organization  of  productive  industry? 

2.  Why  is  it  just  to  limit  a  stockholder's  liability  for  the  debts 
of  a  corporation  ? 

3.  How  does  the  corporate  form  of  organization  make  it  possible 
to  separate  ownership  of  a  business  from  the  management  of  it  ? 


CHAPTER  V 

THE  LAWS  OF  PRODUCTION:    THE  VARIATION  OF  PRO- 
DUCTIVE  FORCES 

I.  The  Law  of  Diminishing  Returns 

§  42o   In  studying  the  consumption  of  wealth  we  saw 
that  the  most    important   principle  governing   that '  pro- 
cess was  the  law  of  the  variation  of   utihty;    it  is  now 
time  to  consider  an  analogous  principle  that 

Variation  of  ,  ,        .  -  ,  ,  ,, 

efficiency  of  govcrns  the  production  01  wealth,  —  tne  vana- 
production.  ^.^^  ^^  ^^^  efficiency  of  productive  forces.  It 
will  appear  that  land,  labor,  and  capital,  when  combined  in 
the  process  of  production,  yield  varying  results  according 
to  the  conditions  under  which  they  are  applied ;  and  that 
the  laws  governing  this  variation  are  some  of  the  most 
important  theorems  of  our  science.  We  shall  discover, 
furthermore,  that  there  are  three  sets  of  conditions  with 
which  the  efficiency  of  production  varies;  and  that,  cor- 
responding to  them,  there  are  three  laws  which  govern 
the  variation. 

§  43.  The  proportions  in  which  land,  labor,  and  capital 
are  combined  are  the  first  condition  that  affects  the  effi- 
Law  of  ciency  of  productive  forces ;  and  the  variations 

diminishing     ^^  ^  rcsult  from  changing  the  proportions  of 

returns :  o     o  1       i 

(a)  From  land,  thcsc  three  factors  are  governed  by  the  law  of 
diminishing   returns,    ppon   a   farm   comprising  twenty 

74 


THE  LAW  OF  D/M/mSHIiVG  RETURNS 


75 


acres  of  land  the  annual  product  will  vary  according  to 
the  amount  of  labor  and  capital  employed  in  cultivating 
it.  Obviously  a  small  expenditure  upon  a  twenty-acre 
tract  will  yield  a  meager  crop,  a  larger  outlay  will  give 
better  results,  and  so  on  until  a  point  is  reached  at  which 
it  is  absolutely  impossible  to  increase  the  plant  hfe  that 
can  find  hght,  room,  and  nourishment  upon  the  farmi 
But  no  cultivator  ever  invests  labor  and  capital  upon  any 
tract  of  land  until  it  is  absolutely  impossible  to  increase 
the  size  of  his  crop.  Even  if  he  has  an  abundance  of 
labor  and  capital  to  employ,  he  will  find  that,  when  a  cer- 
tain point  is  reached,  it  will  be  more  profitable  to  begin 
to  cultivate  another  tract  of  land.  This  is  because,  after 
this  point  is  passed,  each  dollar  expended  begins  to  yield 
a  smaller  return  than  if  it  had  been  invested  elsewhere. 
This  may  be  illustrated  by  the  following  table  which  applies 
to  an  assumed  case. 


Amount  of  Labor 

Average  Yield  to 

Amount  of  Land 

AND  Capital 

Bushels  of  Corn 

Each  Dollar  op 

Cultivated 

USED   IN  Culti- 

Produced 

Labor  and  Capi- 

vating Crop 

tal  Invested 

20  acres  .     .     . 

$100 

200 

2.0  bushels 

20  acres  .     .     . 

$200 

500 

2.5  bushels 

20  acres  .     .     . 

$2>oo 

900 

3.0  bushels 

20  acres  .     . 

$40C 

1040 

2.6  bushels 

20  acres  .     .     . 

$500 

IICX) 

2.2  bushels 

According  to  the  conditions  here  assumed  $100,  or  even 
$200,  is  too  small  an  investment  to  secure  the  best  results 
from  this  twenty-acre  tract ;  and  the  efficiency  of  the  pro- 
ductive process  steadily  increases  as  the  investment  rises 


jrd  THE  LAW^  OF  PRODUCTION 

to $300,  when  an  average  return  of  three  bushels  of  com 
is  secured  for  each  dollar  employed  in  hiring  labor  and 
Explanation  Capital  Bcyond  this  point,  however,  the  average 
ment  0^^^  yield  begins  to  decrease,  so  that  the  additional 
the  law.  labor  and  capital  would    be  employed  more 

efficiently  If  it  were  invested  upon  other  land  equally  good, 
provided  such  land  is  obtainable,^  Upon  these  conditions, 
which  are  recognized  by  every  intelligent  farmer,  econo- 
mists base  the  law  of  diminishing  returns,  which  may  be 
stated  as  follows;  An  increase  of  the  capital  and  labor 
applied  in  the  cultivation  0}  any  tract  0}  land  will,  after  a 
certain  point  is  reached,  yield  an  increased  aggregate  but 
a  smaller  proportionate  return.  If  this  law  were  not  true, 
agricultural  produce  would  be  raised  upon  a  comparatively 
small  amount  of  the  most  fertile  soil,  and  men  would  never 
have  taken  the  trouble  to  bring  inferior  lands  into  cultiva- 
tion. 

So  far  our  illustration   of   the  diminishing  returns  to 

labor  and  capital  employed  upon  a  given  tract  of  land 

has    been    confined    to    agricultural   industry, 

hoidcforai!     but   the   law   is   equally   true   elsewhere.     In 

industries.  -  .1  ,  ,       •  , 

manufactures  it  does  not  pay  to  invest  more 
than  a  certain  quantity  of  labor  and  capital  upon  a  single 
acre  of  land,  since  a  point  is  finally  reached  at  which  it  is 
better  to  extend  a  factory  over  additional  ground  than  to 
carry  it  farther  up  into  the  air.     Although  the  practice 

'  By  increasing  the  investment  from  $300  to  $400  the  product  would 
be  increased  only  by  140  bushels,  so  that  the  last  $100  may  be  regarded 
as  producing  only  140  bushels.  Obviously  if,  by  investing  the  last 
$100  on  a  suitable  amount  of  other  land,  a  product  of  more  than  140 
bushels  could  be  obtained,  the  farmer  would  certainly  make  the  invest* 
mwnt  tiiexe. 


WE  LAW  OF  DIMimSHmG  RET(/Rm         ;; 

varies  in  different  industries,  modem  factory  constructor] 
is  inclined  to  favor  low  buildings  rather  than  the  four  oi 
five  story  structures  that  were  so  common  a  generaticM 
ago.  In  such  a  low  building  the  walls  do  not  need  to  b^ 
made  so  heavy,  expense  for  elevators  is  saved,  machiner;- 
can  often  be  arranged  more  conveniently,  and  the  fire 
risk  is  reduced.  The  law  of  diminishing  returns,  there 
fore,  apphes  to  manufactures  as  well  as  agriculture. 

And  the  same  is  true  of  other  industries.-^  Even  the 
erection  of  office  buildings  in  large  cities  is  limited  in  this 
manner,  although  modern  steel  construction  has 

Even  for 

given  us  the  famili:^  skyscraper.  /The  tallest  office 
building  cannot  be  raised  above  a  certain  point  **'  '°^^ 
except  at  a  rapidly  increasing  expense  foi  elevator  service, 
and  the  provision  for  larger  light  and  air  spaces  dimin- 
ishes the  proportion  of  land  available  for  the  building. 
When  such  structures  are  isolated,  they  pilfer  light  and 
air  from  adjoining  landowners;  but  as  any  section  of  a 
city  becomes  filled  with  them,  the  limitations  just  men- 
tioned grow  more  apparent. 

It  appears,  therefore,  that  sooner  or  later  a  point  of 
diminishing  returns  is  reached  in  all  investments  of  labor 
and  capital  made  upon  any  given  tract  of  land. 
We   must   recognize,    however,    that    this   law  industne's' 
begins  to  operate  much  sooner  in  some  indus-  ^ere^ces! 
tries  than  in  others;    so  that  great  differences 
exist  in  the  amount  that  can  be  invested  before  the  returns 

'  Mining  is  most  rlecidedly  an  industry  of  diminishing  returns.  As  sur 
face  deposits  arc  exhausted,  it  is  ncccssaiy  to  drive  shafts  deep  into  the  earth 
at  a  rajjidly  increasing  expense.  Ultimately,  of  course,  a  mine  may  b< 
exhausted  ;   but  tliis  is  not  what  is  minnt  l-v  diniinisliing  returns. 


j8  THE  LAIVS  OF  PRODUCTION 

begin  to  diminish.  In  agriculture  a  farm  of  forty  acres 
may  permit  an  investment  of  $10,000  in  fixed  capital, 
and  an  annual  outlay  of  $1500  in  actual  cultivation ;  while 
the  same  amount  of  land  might  be  used  for  steel  works 
that  would  represent  a  total  investment  of  $10,000,000. 
With  office  buildings  an  investment  of  $8,000,000  per 
acre  is  possible  in  a  city  of  very  large  size ;  and  it  is  prob- 
able that  these  figures  mark  the  utmost  present  hmit  to 
the  intensive  utihzation  of  land.  Yet  to  farm  and  to 
office  building  the  same  law  applies,  and  the  only  differ- 
ence is  the  extent  of  the  investment  that  can  be  made 
before    diminishing    returns    appear. 

§  44.  What  is  true  of  land  is  true,  also,  of  labor  and 
capital.  With  a  given  quantity  of  labor,  say  the  services 
of  one  man,  the  efficiency  of  production  will 
feturas^from  ^ary  according  to  the  amount  of  land  and 
•c^capitar^  capital  with  which  he  works.  A  tract  of  one 
quarter  of  an  acre,  and  an  appropriate  amount 
of  capital,  will  probably  be  insufficient  to  utilize  fully  the 
services  of  even  a  single  worker;  one  acre  will  give  better 
results,  ten  acres  may  do  still  better,  and  twenty  acres 
will  perhaps  yield  the  largest  return  obtainable  from  the 
labor  of  one  man.  Beyond  this  point  it  will  not  pay  to 
invest  land  and  capital  if  the  services  of  only  a  single 
worker  are  available;  so  that  we  find  here  diminishing 
returns  to  investments  of  land  and  capital  with  a  given 
supply  of  labor.  Similarly  with  capital,  different  amounts 
of  land  and  labor  may  be  employed.  A  given  supply  of 
buildings,  tools,  machines,  and  materials  may  be  combined 
with  little  land  or  labor,  and  produce  a  small  return; 
may  be  employed  with  an  ample  supply,  and  thus  utilized 


THE  LAW  OF  DIMLYISHhVG  RETURN'S  79 

with  the  greatest  efficiency;  or  may  be  spread  out  over 
too  much  land  and  operated  by  too  many  laborers  to  secure 
the  best  results.  With  a  given  amount  of  any  one  factor 
of  production,  increased  investments  of  the  other  two 
factors  will  show  an  increasing  product  up  to  a  certain 
point,  and  beyond  that  point,  a  diminishing  return  for 
each  unit  appHed. 

§  45.  But  while  this  law  holds  true  of  all  three  of  the 
factors  of  production,  its  practical  and  theoretical  con- 
sequences are  not  the  same  in  the  case  of  labor  ^.    .^ 

^  Significance 

and  capital  as  in  that  of  land.     Every  man  oftheiaw 

with  respect 

who  conducts  a  farm,  a  factory,  or  a  store  to  labor  and 
will  endeavor  to  combine  the  three  factors  ^^' 
in  such  manner  as  to  secure  the  largest  returns  with  the 
smallest  outlay.  A  certain  minimum  amount  of  each  is 
necessary  for  the  establishment  of  any  sort  of  enterprise, 
but  beyond  that  point  an  entrepreneur  is  free  to  select 
that  factor  which  is  cheapest  and  invest  it  in  preference 
to  the  others.  Thus  some  land,  some  capital,  and  some 
labor  must  be  had  in  any  factory;  but  if  labor  is  cheap 
and  capital  is  expensive  {i.e.,  if  the  rate  of  interest  is  high), 
somewhat  more  labor  will  be  employed  and  somewhat 
less  machinery  installed.  Such  an  arrangement  means 
that  the  machinery  is  manned  by  enough  workmen  to 
give  a  large  product  for  each  dollar  of  capital  invested, 
even  though  the  labor  would  have  produced  more  if 
employed  upon  more  machines.^     High  rates  of  interest 

^  It  will  be  observed  that  in  this  case  we  take  a  fixed  amount  of  capita] 
and  consider  the  result  of  employing  increasing  amounts  of  labor  upon  it, 
just  as,  with  land,  we  assumed  a  twenty-acre  tract,  and  considered  the 
cesult  of  employing  increasing  amounts  of  labor  and  capital  upon  it. 


8o  THE  LAWS  OF  PRODUCTION" 

and  low  wages  would  make  this  the  most  profitable  method 
of  procedure.  Upon  the  other  hand,  if  wages  are  high 
and  interest  rates  low,  more  machinery  will  be  introduced 
and  somewhat  less  labor  employed.  In  this  case  the 
labor  of  each  workman  would  be  aided  by  enough  machin 
ery  to  make  his  product  large,  even  though  the  machines 
might  have  produced  more  if  additional  laborers  had 
been  employed.  To  the  extent  here  indicated,  labor  or 
capital  is  constantly  being  invested  beyond  the  point  of 
diminishing  returns  in  order  to  secure  the  most  profitable 
utihzation  of  that  factor  which  happens  to  be  most  expen- 
sive. Stated  in  another  way,  this  means  that  there  is  a 
certain  margin  or  zone  within  which  that  factor  of  pro- 
duction which  is  cheapest  will  be  used  in  preference  to 
others.  Under  ordinary  circumstances  this  margin  is 
not  large,  and  it  is  only  within  the  limits  here  defined 
that  any  employer  will  utilize  labor  or  capital  beyona 
the  point  of  diminishing   returns. 

With  land,  however,  the  case  is  different.  An  employer 
can  usually  secure  as  much  labor  and  capital  as  he  needs 
Significance  to  equip  his  enterprise  without  raising  materi- 
with^res^ect  ^Uy  the  price  of  these  two  factors  of  produc- 
to  land.  ^sQVi,  because  our  supphes  of  capital  and  labor 

constantly  increase  with  the  growth  of  wealth  and  numbers. 
But  the  supply  of  land  does  not  increase  as  the  popula- 
tion and  industry  of  a  community  grow ;  so  that  its  price, 
i.e.,  the  rent  that  it  bears,  tends  steadily  to  rise  on  account 
of  the  increased  demand  for  farms,  house  lots,  and  site, 
for  factories.  Sooner  or  later  it  happens  that  the  best 
tracts  of  land  are  utilized  as  fully  as  possible  without 
investing  labor  and  capital  beyond  the  point  of  dimin- 


THE  LAW  OF  DIMINISHIN-Q  RETURN^  8 J 

ishing  returns,  and  then  producers  have  no  option  but 
to  use  inferior  tracts  or  to  invest  upon  the  old  land  more 
labor  and  capital  than  can  be  used  to  the  best  advantage. 
Both  of  these  things  are  finally  done;  and,  therefore, 
the  utihzation  of  land  becomes  more  and  more  intensive 
and  expensive.  Thus  the  growth  of  population  forces 
a  community  to  use  its  land  beyond  the  point  of  diminish- 
ing returns,  while  no  such  pressure  exists  in  the  case  ol 
labor  and  capital. 

With  land,  therefore,  the  law  of  diminishing  returns 
has  a  peculiar  significance.  The  earlier  economists, 
who    studied    the    law    solely    with    reference 

.  .      ,.        ,  Conclusion 

to  agricultural  industry,  were  mchned  to 
interpret  it  as  meaning  that  the  human  race  necessarily 
secures  its  food  and  other  rav/  produce  with  increasing 
difficulty,  as  population  advances.  This,  of  course, 
would  be  the  result  of  investing  upon  poorer  lands,  or 
upon  the  better  soils  beyond  the  point  of  diminishing 
returns,  if  nothing  else  entered  into  the  problem.  But, 
as  a  matter  of  fact,  improved  methods  of  cultivation, 
agricultural  machinery,  and  the  better  organization  of 
industry  may  enable  the  poorer  soils  —  and  the  invest- 
ments made  beyond  tlie  point  of  diminishing  returns 
upon  the  superior  soils  —  to  yield  as  large  a  product  for 
a  given  outlay  as  was  secured  under  the  earlier  conditions. 
All  depends  upon  whether  the  progress  of  agricultural 
methods  keeps  pace  with  the  increased  demand  upon  the 
land.  Broadly  speaking,  it  appears  to  have  done  so  ir 
the  past;  and  at  the  present  moment  the  application 
of  modern  science  to  agriculture  seems  to  be  opcnint,' 
a  new  era  for  that  industry.     What   may  happeii   in   th- 


82  THE  LAWS  OF  PRODUCTIOISr 

remote  future  is  wholly  a  matter  for  prophecy,  concern- 
ing which  speculation  is  unprofitable;  for  the  present, 
and  for  any  future  that  we  need  contemplate,  there  is  no 
reason  for  thinking  that  the  operation  of  the  law  of  dimin- 
ishing returns  will  mean  that  the  race  will  procure  its 
subsistence  with  an  increasing  expenditure  of  labci  and 
capital. 

II.  The  Law  of  Economy  in  Organization 

§  46.   The  second  condition  that  affects  the  efficiency 

of  productive  forces  is  the  total  amount  of  land,  labor, 

and  capital  that  is  aggregated  in  a  single  busi- 

Variations  in  ^  ,  00     o  o 

the  size  of  a  ncss  enterprise.  Here  we  have  to  deal  with 
the  comparative  advantages  and  disadvantages 
of  large-  and  small-scale  production.  The  variation  in 
efficiency  that  accompanies  changes  in  the  size  of  a  busi- 
ness is  governed  by  the  law  of  economy  in  organization. 
It  will  appear,  however,  that  our  present  knowledge  of 
the  facts  of  modern  industry  is  not  sufficient  to  enable 
us  to  formulate  this  law  with  as  much  precision  as  was 
possible  with  the  law  of  diminishing  returns. 

§  47.   In  manufacturing   industry  the   new  machinery 
that  was  introduced  at  the  time  of  the  Industrial  Revolu- 
tion accelerated  in  a  very  marked  degree  the 

Growth  of  ■' 

the  factory  growth  of  what  IS  known  as  the  factory  system. 
sys  em.  Steam    engines    and    other    costly    machines 

could  not  be  used  economically  in  the  little  workshops 
where  production  had  previously  been  carried  on,  even 
if  each  small  producer  had  been  able  to  buy  them.  Ac- 
cordingly it  became  necessary  to  organize  manufactur- 
ing industry  in  factories  where  expensive  machinery  and 


THE  LAW  OF  ECONOMY  IN  ORGANIZATION      83 

large  bodies  of  laborers  could  be  brought  together  under 
skillful  supervision;  and,  later,  gigantic  corporations 
entered  some  parts  of  the  field,  establishing  the  mammoth 
enterprises  that  are  characteristic  of  our  time.  During 
the  nineteenth  century,  therefore,  there  was  a  remark- 
able tendency  toward  the  concentration  of  manufactures 
in  large  enterprises. 

Some  statistics  from  the  census  of  1900  will  show  how 
greatly   the    size   of   manufacturing   establish-  statistics  foi 
ments  increased   in   certain   industries   in   the  manutrc" 
United  States  during  the  last  half  of  the  nine-  ^"^®®- 
teenth  century :  — 


Average 

Industries 

Number  of 
Employees 
per  estab 

Average  Capital 
PER  Establishment 

Average  Product 
PER  Establishment 

LISHMENT 

1850 

1900 

1850 

1900 

1850 

1900 

Iron  and  steel  .    .     . 

S3 

333 

^46.716 

5858.371 

$^ZPlo 

§1,203,545 

Agricultural    i  m  p  1  e  - 

ments       .... 

5 

65 

2,674 

220,571 

5.133 

141.549 

Leather,    tanned    and 

finished    .... 

4 

40 

3.406 

133.214 

6,500 

156,231 

Silk  and  silk  goods  . 

26 

135 

10,124 

167,872 

27,007 

222,063 

Paper  and  wood  pulp 

15 

65 

16,390 

219,538 

22,996 

166.876 

Cotton  goods  .     .    . 

84 

287 

68,100 

442,882 

56.553 

321.517 

Woolen  goods      .     . 

25 

67 

18,036 

120,180 

27.715 

114.425 

This  table  requires  little  comment.  So  far  as  the  aggregate 
masses  of  labor  and  capital  invested  in  a  single  establish- 
ment are  concerned,  concentration  is  most  marked  in  the 
iron  and  steel  industry.  If,  however,  the  comj)arative 
changes  since  1850  are  considered,  it  ai)pcars  that  the 
percentage  of  increase  in  the  size  of  the  average  cstab 


84 


THE  LAWS  OF  PRODUCTION 


lishment  has  been  most  marked  in  the  manufactuie  oi 
agricukural  implements. 

Other  industries  show  this  tendency  toward  large-scale 
production  in  different  degrees.  In  transportation  the 
other  growth  of  vast  railroad  systems  has  been  very 

industries.  marked.^  In  wholesale  and  retail  trade  the 
tendency  is  less  uniform,  since  small  shops  persist  even 
by  the  side  of  the  department  store.  Ten  or  twenty  years 
ago  it  was  often  thought  that  agriculture  was  showing  a 
perceptible  tendency  toward  concemration,  but  experi- 
ence has  demonstrated  that  such  a  view  was  incorrect.^ 
This  industry,  in  fact,  seems  not  to  have  been  greatly 
aflfected  by  the  forces  that  elsewhere  have  led  to  the  aggre- 
gation of  land,  labor,  and  capital  in  larger  masses. 

§  48.  Wherever  an  industry  has  become  concentrated 
The  econo-  in  larger  estabHshments,  the  change  has  come 
™aie°U^'^^^  about  for  the  reason  that  production  could  bt 
duction.  carried  on  most  economically  in  that  manner. 

1  In  1902  the  total  mileage  of  American  railways  was  203,132  miles, 
Of  this,  165,321  miles  was  controlled  by  nineteen  great  railway  systems, 
of  which  the  eight  largest  controlled  about  two  thirds  of  all  the  mileage 
of  the  country,  and  handled  more  than  that  proportion  of  the  total  traffic. 

2  The  census  of  1910  shows  that,  since  1880,  farms  of  less  than  fifty 
acres  have  increased  at  the  expense  of  the  larger  farms :  — 


Percentage  of  American  Farms  of  Specified  Areas 

Year 

1-19  Acres 

20-49 

Acres 

SO-99 
Acres 

100-499 
Acres 

Soo  Acres 
and  Over 

1880 
1890 
1900 
1910 

9.8 

9.1 

11.8 

13-2 

19-5 
19.8 
21.9 
22.2 

25.8 
24.6 
23-8 
22.6 

42.3 
44.0 

39-9 
39-2 

2.6 

2-5 
2.6 
2.8 

THE  LAW   OF  ECONOMY  TN  ORGANIZATION'      85 

The  economies  that  arc  often  secured  by  large-scale  pro- 
duction may  be  classified  as  follows:  — 

(i)  Economy  in  fixed  capital  is  one  important  factor. 
Modern  machine  production  requires  a  very  large  outlay 
for  such  purposes  and  it  is  probable  that  fixed  capital 
is  an  increasing  element  in  the  cost  of  producing  manu- 
factured goods.  Now  within  certain  limits,  at  least, 
the  cost  of  fixed  capital  does  not  increase  as  rapidly  as 
the  product  of  a  factory  can  be  enlarged.  A  large  build- 
ing costing  less  than  two  small  ones  may  furnish  room 
for  the  same  amount  of  machinery.  Generally,  too,  the 
larger  factory  can  be  equipped  with  a  smaller  expenditure, 
in  proportion  to  its  capacity,  for  engines  and  other  machin- 
ery. In  the  big  establishment  no  machine  is  needlessly 
duphcated,  while  in  two  small  ones  costly  appHanccs  may 
stand  idle  for  half  the  time  because  the  product  is  not 
large  enough  to  keep  them  fully  occupied.  Railroads, 
both  steam  and  electric,  water  works,  and  lighting  plants 
furnish  striking  illustrations  of  the  economies  in  fixed 
capital  that  result  from  production  upon  a  large  scale. 
In  any  territory  one  such  company  can  supply  all  the  serv- 
ice required  very  much  more  cheaply  than  two.  because 
with  a  single  concern  it  is  necessary  to  lay  but  one  set  of 
tracks  or  v/ater  mains  or  gas  pipes  or  electric  wires;  and 
there  may  be  a  saving,  as  well,  in  the  cost  of  power.  This 
economy  in  fixed  capital  is  very  great  in  the  industries 
last  mentioned,  but  it  is  an  important  factor  also  in  manu- 
factures and  commerce.  If  the  annual  expenses  for 
''merest  and  repairs  on  fixed  capital  are  $300,000  in  any 
establishment,  then  the  cost  of  this  factor  will  be  thirty 
cents  per  dollar  of  product  when  the  output  is  $1, 00c, 000 


THE  LAWS  OF  PRODUCTION 

Mow,  if,  by  merely  utilizing  the  plant  to  its  maximum 
capacity,  the  product  can  be  increased  to  $1,500,000,  the 
cost  of  fixed  capital  will  be  reduced  to  twenty  cents  per 
unit  of  output. 

(2)  Economy  may  be  secured  also  in  the  outlay  for 
circulating  capital.  A  large  factor)'  may  need  less  fuel 
than  several  smaller  ones  of  no  greater  capacity.  A  big 
store  does  not  need  to  keep  on  hand  at  all  times  twice  the 
stock  of  goods  that  each  of  two  smaller  stores  will  require 
in  order  to  supply  promptly  any  probable  demand  of  their 
customers. 

(3)  Another  advantage  of  a  large  concern  is  its  ability 
to  command  the  capital  necessary  for  experimentation  with 
new  machinery  and  methods.  Invention  and  experiment 
are  often  costly  undertakings,  and  small  concerns  cannot 
afford  to  keep  skilled  inventors  and  expert  chemists  at  work 
to  improve  the  processes  by  which  business  is  carried  on. 

(4)  Economy  in  skill  often  results  from  large-scale 
production.  Labor  can  be  more  efficiently  subdivided 
in  a  large  factory,  since  all  operatives  can  be  allowed  to 
speciaUze  on  a  single  process,  while  men  of  exceptional 
talent  can  be  given  the  particular  kind  of  work  for  which 
they  are  best  litted. 

(5)  In  many  industries  only  a  part  of  the  raw  materials 
can  be  employed  in  manufacturing  the  main  product, 
so  that  much  is  wasted  unless  some  way  of  utihzing  it 
can  be  discovered.  In  a  large  business  the  amount  of  such 
waste  becomes  so  great  as  to  afford  a  strong  incentive 
to  devise  methods  of  utihzing  it.^     In  refining  petroleum 

^  See  the  interesting  and  valuable  monograph  on  "Utilization  ot 
Wastes,"  in  Twelfth  Census,  Rep't.  Mfgrs.,  IV,  pp.  723-748. 


THE  LAW  OF  ECONOMY  IN  ORGANIZATION      87 

material  that  fomieriy  was  wasted  is  now  used  in  the 
production  of  lubricating  oil,  naphtha,  paraffine,  and  a 
large  number  of  other  articles.  So,  too,  in  the  beef  and 
pork-packing  industr}',  hides,  hoofs,  horns,  blood,  hair, 
and  bristles  are  completely  utiHzed  in  the  manufacture 
of  a  great  variety  of  by-products. 

(6)  Finally  great  establishments  find  it  convenient  and 
profitable  to  carry  on  for  themselves  many  allied  or  sub- 
sidiar)'  processes.  Oil  refiners  make  their  own  barrels, 
tin  cans,  pumps,  sulphuric  acid,  and  many  other  supplies; 
while  sugar  refiners  secure  raw  sugar  from  their  own 
plantations  in  Cuba,  occupy  their  own  wharves  and  ware- 
houses, and  make  their  own  barrels  and  boxes.  In  the 
iron  and  steel  industry  the  principal  producers  began, 
a  decade  or  more  ago,  to  acquire  mines  of  iron  ore  in 
Michigan  or  Minnesota,  to  purchase  railways  or  steam- 
ships required  for  transporting  this  material  to  their  fur- 
naces, and  to  purchase  lands  containing  deposits  of  coal 
or  limestone.  Thus  there  has  developed  a  process  which 
has  been  called  the  integration  of  industry,  by  which  the 
producers  of  the  more  highly  finished  products  have 
sought  to  control  all  the  preliminary  stages  of  manufacture, 
and  to  secure  their  raw  materials  at  the  lowest  possible 

iX>St. 

§  49.  It  must  not  be  inferred  from  what  has  preceded 
that  every  and  all  increase  in  the  size  of  business  under- 
takings necessarily  leads  to  more  economical  opposing 
production,  so  that  the  process  of  conccntra-  '*""'■ 
tion  must  continue  until  in  every  branch  of  industry  a 
single  company  displaces  all  others.  In  railway  trans- 
portation, indeed,  and  in  the  distribution  of  such  com- 


88  THE  LAWS   OF  PRODUCTION 

modities  as  water,  gas,  and  electricity,  experience  does 
seem  to  show  that,  in  any  given  district,  one  company 
can  usually  supply  the  entire  demand  more  economically 
than  two.  But  in  agriculture  precisely  the  reverse  is 
true;  while  in  manufactures  and  commerce  it  seems 
certain  that  not  all  the  advantages  are  on  the  side  of  the 
mammoth  establishment.  The  considerations  that  tell  in 
favor  of  the  enterprise  of  moderate  size  are  as  follows :  — 

(i)  In  many  cases  it  appears  that  the  maximum  effi- 
ciency of  the  mechanical  processes  is  secured  when  a  plant 
has  attained  a  certain  size.  In  some  of  the  textile  indus- 
tries, a  factory  of  moderate  size  will  insure  the  greatest 
economy  of  fixed  capital  attainable;  and  it  is  probable 
that  in  all  branches  of  manufactures  a  limit  is  finally 
reached  at  which  the  further  concentration  of  capital 
in  a  single  establishment  ceases  to  be  profitable.  In  a 
sugar  refinery  from  $4,000,000  to  $5,000,000  may  be 
invested  before  this  point  of  maximum  economy  is  reached, 
and  in  the  production  of  iron  and  steel  $10,000,000  may 
be  required;  but  sooner  or  later  it  becomes  impossible 
to  increase  the  efficiency  of  productive  forces  by  enlarging 
the  size  of  a  factory. 

(2)  To  an  increasing  extent  power  for  manufacturing 
processes  is  distributed  to  a  number  of  estabHshments 
from  a  central  power  station,  with  considerable  advan- 
tages to  smaller  producers.  As  electric  power  comes  into 
more  general  use,  the  importance  of  this  consideration 
will  be  greatly  increased.^ 

^  In  1890  all  our  manufacturing  industries  employed  5,954,000  horse- 
power, of  which  only  88,571  horsepower  was  rented  from  central  powei 
stations.     In  1909,  out  of  a  total  horsepower  of  18,675,000  not  less  than 


THE  LAW   OF  ECO.VOMV  IiV  ORGAXIZATION'      89 

(3)  Not  infrequently  a  number  of  small  establish- 
ments may  be  located  in  the  same  region  and  may  cooper- 
ate to  secure  many  of  the  advantages  that  larger  producers 
enjoy.  Small  producers  have  combined  to  construct 
pipe  lines,  by  which  petroleum  is  transported  from  the 
oil  regions  to  distant  refineries;  and  have  cooperated 
in  the  estabUshment  of  plants  for  the  utilization  of  waste 
products. 

(4)  New  processes  and  improved  machinery  are  often 
given  wide  publicity  at  the  present  day  through  trade  papers 
and  other  agencies.  This  tends  to  disseminate  informa- 
tion; and,  as  often  as  not,  the  improved  appHances  can. 
be  bought  or  rented  by  the  small  as  well  as  by  the  large 
producer. 

(5)  Another  respect  in  which  the  balance  of  advantage 
may  turn  in  favor  of  the  smaller  establishment  is  found 
in  the  necessity  for  securing  skillful  supervision.*  The 
individual  proprietor  or  the  partner  in  an  ordinary  firm 
has  the  strongest  conceivable  inducement  to  industry  and 
carefulness,  and  the  smaller  scale  of  his  operations  enables 
him  to  give  his  personal  attention  to  the  details  of  the 
business.  In  the  eighteenth  century  Adam  Smith  had 
argued  that  corporations  could  never  be  managed  so 
efficiently  as  business  partnerships,  since  the  hired  man- 

1,872,000  was  rented.  Thus  rented  power  increased  from  a  little  less 
than  1.5  percent  to  over  10  per  rent  of  the  total  power  employed.  Of 
the  1,872,000  horsepower  rented,  no  less  than  i,74y,ooo  horsepower  was 
supplied  by  electricity. 

'  In  agriculture  this  consideration  is  especially  important.  Each  five- 
acre  field  on  a  farm  may  be  best  adapted  for  raising  a  different  crof). 
Only  on  a  farm  of  moderate  size  can  the  varying  capacities  of  the  soil 
be  studied,  and  the  greatest  economy  secured. 


90  THE  LAWS  OF  PRODUCTION^ 

agers  of  corporate  enterprises  controlled  not  their  own 
capital,  but  that  of  other  people.  Up  to  the  time  at  which 
he  wrote,  Enghsh  experience  seemed,  on  the  whole,  to 
justify  this  view;  but  in  the  nineteenth  century  corpora- 
tions learned  to  secure  able  management  by  offering  large 
salaries  and  inducing  their  employees  to  acquire  stock, 
thus  gaining  a  personal  interest  in  the  success  of  the  busi- 
ness. While  corporation  management,  at  the  best,  now 
seems  to  be  highly  efficient,  it  remains  true,  nevertheless, 
that  it  is  not  so  uniformly  good  as  to  deprive  Smith's 
criticism  of  all  weight.  It  should  be  observed,  moreover, 
that,  even  if  the  management  remains  equally  honest 
and  skillful,  the  difficulties  of  the  task  increase  greatly 
as  the  scale  of  operations  grows;  and  many  things  have 
to  be  left  to  subordinate  officers  who  are  not  superior 
to  the  ordinary  run  of  hired  servants.  Thus  the  race 
is  not  always  to  the  swift;  and  the  concern  of  moderate 
size,  managed  by  its  proprietors,  may  gain  certain  advan- 
tages that  are  denied  to  mammoth  corporations. 

(6)  Finally,  it  usually  happens  that  the  growth  of  any 
one  estabHshment  is  hmited  by  the  necessity  of  finding 
a  market  for  its  product.  In  the  local  market  an  estab- 
lishment has  an  advantage  over  distant  competitors;  but 
as  it  seeks  to  extend  its  sales,  the  cost  of  securing  the  addi- 
tional business  increases.  This  difficulty  is  greatest  in 
industries  that  produce  articles  of  which  the  use  depends 
on  a  varying  public  taste  or  changing  fashions;  but  it 
exists  even  with  staple  products,  and  tends  powerfully 
to  check  the  growth  of  an  enterprise  after  a  certain  stage 
of  development  has  been  reached. 

§  50.   From  all  these  considerations  it  is  manifest  that 


THE  LAWS  OF  SUPPLY  9 1 

it  is  impossible  to  formulate  a  single  principle  governing 
the  economy  of  organization.  In  the  distributive  indus- 
tries the   rule  seems   to  be  that  any  increase 

.  .  .      .  Conclusions. 

m  the  size  of  a  business  unit  increases  the 
efficiency  of  the  productive  process,  at  least  up  to  the 
point  where  the  local  field  is  fully  supplied.  With  other 
industries  the  law  apparently  is  that,  with  modern  machin- 
ery and  processes,  an  increase  in  the  scale  of  operations 
that  a  single  enterprise  conducts  increases  the  efficiency 
of  productive  forces  up  to  a  certain  point  at  which  the 
maximum  economy  is  attained,  and  that  this  condition 
of  highest  efficiency  is  reached  before  a  single  concern 
monopohzes  an  entire  field.  These  conclusions  arc 
necessarily  based  upon  our  present  experience  with  the 
movement  toward  concentration  of  production,  and  may 
require  subsequent  modification ;  they  involve,  too,  a 
number  of  questions  which  cannot  be  considered  fully 
until  we  reach  the  chapter  devoted  to  the  subject  of 
monopoly. 

III.  The  Laws  of  Supply 

§  51.  The  efficiency  of  productive  forces  must  now 
be  studied  from  a  third  point  of  view,  —  the  conditions 
that  prevail  in  an  entire  industry  that  is  sub-  variations  in 
ject  to  the  force  of  competition^  and  requires  a  of  anenure*^^ 
number  of  rival  enterprises  to  produce  the  """^"^try. 
full  supply.  And  here  we  shall  be  under  the  necessity 
of  distinguishing  sharply  between  two  standpoints  from 

'  An  in'lustry  that  is  monopolized  by  a  single  concern  comes  unlcr  the 
laws  governing  tlie  efficiency  of  production  in  one  establishment.  'I  his 
subject  has  been  treated  adequately  in  the  preceding  |>ages.  Here  we 
need  consider  only  those  industries  which  are  subject  to  competition 


92  THE  LAWS  OF  PRODUCTION 

which  the  industry  may  be  studied;  first,  the  condition 
of  the  industry  for  any  brief  period  of  time  when  its  status 
may  be  regarded  as  fixed;  and  second,  the  condition 
iJiat  results  from  a  change  in  the  supply. 

§  52.  l^roceeding  in  the  order  just  indicated,  let  us 
consider  the  efficiency  of  the  productive  forces  that  are 
(«)  Under  employed  by  a  competitive  industry  at  a 
tions*^:  *suppiy  time  when  nothing  occurs  to  alter  materially 
and  demand     ^^  supply  or  the  demand.     Under  such  con- 

remaining  rr  j 

unchanged,  ditions  we  find  that  there  are  a  number  of 
different  establishments  which  enjoy  varying  natural 
advantages,  possess  equipments  of  varying  efficiency, 
and  are  managed  with  varying  ability,  so  that  the  cost  of 
production  is  not  the  same  for  all  competitors.  Of  course 
the  superior  concerns  are  continually  taking  trade  away 
from  the  inferior,  which  are  constantly  being  driven  out 
of  business ;  but  such  competition  does  not,  as  a  matter  of 
fact,  establish  a  uniform  level  of  costs.  It  is  a  matter 
of  common  experience  that  some  men  or  companies  in 
an  industry  make  money  when  selling  at  prices  that  leave 
others  Httle  or  no  profit;  and  this  could  not  be  the  case 
if  the  cost  of  production  were  the  same  in  all  estabhsh- 
ments.  In  recent  years  when  trusts  have  been  organized 
in  so  many  of  our  industries,  this  fact  has  been  clearly 
revealed  as  soon  as  the  various  plants  have  been  brought 
under  one  management. 

Upon  these  facts  we  base  the  law  of  varied  costs :  that, 
in  any  competitive  industry,  rival  establishments  will 
The  law  of  fumish  their  respective  portions  of  the  supply 
varied  costs.  ^^  different  costs.  To  the  producer  who, 
laboring  under  the  greatest  disadvantages  or  possessing 


THE  LAPt^s  or  saPPLV  <^% 

the  least  skill,  furnishes  his  part  of  the  supply  at  the  greatest 
cost,  economists  apply  the  name  of  marginal  producer. 
In  our  study  of  the  causes  that  determine  value,  we  shall 
see  that  the  marginal  producer  plays  an  important  part 
in  the  process. 

§  53.    W'e   now   pass   to   the   second   standpoint   from 
which  the  efficiency  of  an  industry  can  be  studied,  and 
consider  the  variations  produced  by  changes  in   ^^^  n^i^^x 
the  supplv.    If  the  production  of  anv  commoditv  dynamic  con 

rxr.  r  *  ,      ditions,  in- 

is  to  be  increased,  this  can  be  accomplished  voiving 

...  changes  in 

in  one  of  two  ways :  either  improvements  may  supply  and 
be  made  that  enlarge  the  product  obtainable 
from  a  given  amount  of  land,  labor,  and  capital,  or 
additional  amounts  of  the  three  factors  must  be  invested 
in  the  industry.  If  the  need  for  an  increased  supply 
stimulates  improvements,  or  enables  the  competitors  to 
increase  the  scale  of  their  operations  —  with  a  consequent 
economy  in  production  —  then  the  marginal  cost  of  the 
entire  supply  is  hkely  to  decline.  If,  however,  such 
improvements  are  not  made,  the  enlargement  of  the 
supply  will,  not  improbably,  raise  the  marginal  cost  of 
production ;  because  it  will  be  necessary  to  utilize  inferior 
natural  advantages  or  to  call  inferior  labor  or  inferior 
organizing  ability  into  the  business. 

Thus  if  the  market  requires  an  increase  of  ten  per  cent 
in  the  output  of  steel  rails,  the  additional  supply  might 
be  procured  by  operating  the  existing  plants        ^^^ 
to  the  full  limit  of  their  produclivitv,  and  bv  marginal 

'     cost  of  an 

enlarging  the  capacity  of  some  of  the  best  of  increasing 
them.     These  changes  would  result  in  increased  *"''''  ^ 
efficiency;  and  the  marginal  cost  of  production  miglit  bo 


94  THE  LAWS  OF  PRODVCTtOtf 

somewhat  reduced  so  that  the  increased  supply  would 
actually  be  procured  at  a  decreased  marginal  cost.  Upon 
the  other  hand,  if  the  supply  of  wheat  were  to  be  in- 
creased by  twenty  per  cent,  it  is  possible  that  inferior 
lands  would  need  to  be  taken  into  cultivation,  and  that 
the  marginal  cost  of  production  would  rise. 

From  consideration  of  such  cases  as  these,  some  econo- 
mists have  been  inclined  to  hold  that  the  supply  of  a  manu- 
factured product  can  regularly  be  increased  at 

Manufactures  \  . 

and  agricui-  a  decreasing  marginal  cost ;  and  that  the  supply 
of  agricultural  produce  can  be  enlarged  only 
at  an  increasing  marginal  cost.  It  is  probable  that  such 
a  view  exaggerates  the  differences  between  manufacturing 
and  agricultural  industries.  In  manufactures  it  is  cer- 
tainly true  that  the  producers  are  less  likely,  when  they 
undertake  to  enlarge  their  output,  to  be  obliged  to  utilize 
inferior  natural  agents ;  ^  and,  for  this  reason,  it  is  unlikely 
that  an  increased  supply  will  be  furnished  at  a  greater 
marginal  cost.  But,  upon  the  other  hand,  it  cannot  be 
doubted  that  "agricultural  methods  are  susceptible  of 
constant  improvement;  and  that  sometimes  the  need 
of  enlarging  the  supply  might  lead  to  a  better  organiza- 
tion of  production  and  a  reduction  of  the  marginal  cost. 
Moreover,  it  is  not  true  that  the  need  of  increasing  the 
supply  invariably  stimulates  manufacturers  to  improve 
their  methods  of  production  and  the  organization  of  their 
industry ;  much  depends  upon  the  temper  of  the  producers 

1  It  should  be  remembered,  however,  that  manufacturing  industry  is 
dependent  upon  agricultural  and  mining  industry  for  its  materials,  which 
form  a  very  important  element  in  the  cost  of  production.  It  is  probable 
that  a  very  great  increase  in  the  output  of  manufactures  would  raise  the 
marginal  cost  of  the  larger  supply  of  materials  that  would  be  required. 


THE  LAWS  OF  SUPPLY  V^^S-  j 

and  upon  the  prospect  of  the  increased  demand  proving 
permanent. 

Conceivably,  the  supply  of  any  commodity  might  be 
enlarged  at  a  uniform  cost;    but  it  is  hardly  probable 
that    the    change    in    output    will    leave    the  Theprob- 
conditions    of    production    unaltered,   so    that  unifo^°mar 
the  usual  result  will  be  to  raise  or  to  lower  ginaicost. 
the  marginal  cost.     The  law,  therefore,  that  governs  the 
efficiency  of  production  when  the  supply  of  a  commodity 
is  enlarged  may  be  stated  as  follows:  An  increased  supply 
0}  a  commodity  will  usually  be  obtained  at  an  increased 
or  decreased  marginal  cost,   the  latter  result  being  more 
likely  to  occur  in   manufacturing  industry  than  in  agri- 
culture. 

Only  a  few  words  are  needed  to  explain  what  must 
happen  when  the  production  of  a  commodity  is  reduced. 
If  such  a  reduction  is  permanent,  the  producers  (2)  The  mar- 
will   be  obliged   to  compete   with   each  other  fd^creas^ng 
more    sharply    for   what    trade    remains,    and  ^"PPiy- 
this  competition  will  drive  out  of  business  those  concerns 
which  have  been  at  the  greatest  disadvantage;   i.e.,  the 
marginal  producers.     For  this  reason  a  permanent  reduc- 
tion of  the  supply  will  have  the  effect  of  reducing  the 
marginal  cost  of  production. 

§  54.  We  have  now  considered  the  conditions  under 
which  the  supply  of  any  commodity  is  produced,  and 
have   seen    that    the   cITicicncy   of   production 

.       Conclusions. 

is  likely  to  vary  whenever  a  change  occurs  m 
the  total  output.     The  principles  that  govern  such  varia- 
tions may  be  termed  the  laws  of  supply,  and  may  be  con- 
sidered analogous  to  the  law  of  demand,  with  which  our 


96  THE  LAWS  OF  PRODUCTION- 

discussion  of  consumption  closed.  In  the  following 
chapter  we  shall  appeal  to  the  laws  both  of  demand  and 
of  supply  in  our  explanation  of  the  forces  that  determine 
the  value  of  commodities. 

FOR   SUPPLEMENTARY   STUDY 

General :  Marshall,  Economics,  227-249,  357-37°?  393-4oo ;  NiCH 
OLSON,  Political  Economy,  I,  122-130,  ^38-1 74;  Taussig, 
Principles  of  Economics,  I,  49-66. 

QUESTIONS 

1.  If  there  were  no  law  of  diminishing  returns,  would  agricul- 
tural industry  be  organized  as  at  present  ? 

2.  Have  you  ever  observed  or  learned  any  facts  relating  to  the 
advantages  or  disadvantages  of  large-scale  production  in  any 
particular  industry  ? 

3.  Why  is  agricultural  industry  more  likely  than  manufacturing 
to  be  governed  by  the  law  of  increasing  marginal  cost  ? 


CHAPTER  VI 

THE  THEORY  OF  EXCHANGE 
I.  The  Advantages  of  Exchange 

§  55.  The  advance  of  the  human  race  from  the  lowei 
to  the  higher  stages  of  economic  development  has  been 
accompanied  and  greatly  aided  by  a  constant  extension 
of  the  process  of  exchange.  Confined  in  the  The  influence 
earliest  times  to  dealings  in  easily  transport-  °*  commerce. 
able  articles,  such  as  precious  stones  or  metals,  ivory, 
spices,  and  fine  fabrics,  commerce  has  progressed  with 
improved  methods  of  transportation,  so  that  even  bulky 
and  perishable  commodities  can  now  be  readily  exchanged 
between  distant  places.  Withal,  commerce  has  ever  been 
a  prime  civilizing  agency,  bringing  distant  and  hostile 
people  into  friendly  intercourse,  broadening  men's  ideas, 
extending  knowledge  of  all  the  arts,  and  tending  with 
increasing  power  to  the  maintenance  of  peace  and  inter- 
national comity  among  the  nations  of  the  earth. 

§  56.  It  was  once  commonly  believed  that  an  exchange 
of  products  could  benefit  but  one  of  the  two  parties  to  the 
transaction,  since  it  was  thought  that  what  Exchange 
one  gained  the  other  must  lose.  This  view,  toboth^^^""" 
which  has  not  yet  entirely  disappeared,  is  wholly  parties, 
unwarranted,  as  will  be  made  evident  by  considering  the 
reasons  why  men  desire  to  effect  exchanges.     Such  a  con- 

97 


98  THE   THEORY  OF  EXCHANGE 

sideration  will  demonstrate  that  ordinarily  both  parties 
to  an  exchange  may  and  do  profit  thereby. 

In  the  first  place,  individuals,  communities,  and  even  na- 
tions  differ  very  w^idely  in  tastes  and  customs,  so  that  one 
Reasons  tor  pcrson  or  group  of  persons  may  prize  highly 
geousnessof  ^  Commodity  that  possesses  little  utihty  for 
exchange.  others.  Under  such  circumstances,  which  are 
the  rule  rather  than  the  exception,  an  exchange  of  com- 
modities will  place  each  article  where  it  will  have  the 
greatest  utility,  and  increase  materially  the  sum  of  human 
satisfactions.  Again,  both  individuals  and  communities 
have  different  aptitudes  for  the  various  kinds  of  productive 
labor;  and,  by  exchanging  their  products,  can  devote 
themselves  to  the  particular  callings  for  which  they  are 
best  fitted.  In  this  way  the  production  of  wealth  will  be 
vastly  increased,  and  all  concerned  may  be  greatly  bene- 
fited. Then  it  is  usually  true  that  persons  and  communi- 
ties have  different  natural  environments ;  arable  or  pasture 
lands,  valuable  mines  or  forests,  sea  fisheries,  water 
powers,  and  favorable  climatic  conditions  are  not  every- 
where available,  or  available  in  equal  degree.  'By  ex- 
changing cotton  cloth  for  wheat,  Massachusetts  has  been 
enriched  by  the  bounty  of  the  fertile  prairies  of  the  West, 
while  Iowa  and  Kansas  have  profited  by  the  water  power 
and  acquired  skill  of  New  England. 

II.  Market  Value 

§  57.  In  the  course  of  trade,  commodities  exchange 
for  each  other  in  certain  definite  proportions.  A  bushel 
of  wheat,  for  in-stance,  may  command  two  bushels  of  oats; 
and,  when  this  is  the  case,  the  value  of  wheat  is  said  to 


MARKET  VALUE  ^ 

be  twice  that  of  oats.  It  appears,  therefore,  that  the 
word  "value"  refers  to  the  relations  that  exist  between 
commodities  in  the  act  of  exchange;  and  we  vaiueand 
may  define  it  as  the  power  which  a  commodity  P"*^®- 
has  to  command  other  commodities  in  exchange.  The 
value  of  every  sort  of  merchandise  is  usually  expressed 
in  terms  of  money,  for  which  all  goods  are  generally  sold. 
If  wheat  is  worth  ninety  cents  in  money,  and  the  price  of 
corn  is  sixty  cents  and  of  oats  forty-five  cents,  we  know  at 
once  the  relative  value  of  the  three  grains  without  going 
to  the  trouble  of  exchanging  a  bushel  of  one  for  a  bushel 
of  the  others.  A  price,  in  fact,  may  be  defined  as  a  value 
expressed  in  terms  of  money. 

§  58.  Whenever  we  say  that  the  price  of  wheat  is  ninety 
cents  a  bushel,  we  refer  to  the  value  in  a  certain  market 
and    at    a    certain    time.     Between    different 

Markets. 

markets  variations  of  prices  may  exist,  and  from 
one  time  to  another  changes  are  likely  to  occur.  By 
a  market  is  meant  the  establishment  of  such  free  inter- 
course between  traders  that  a  single  price  rules  for  a  given 
commodity  at  a  given  time.  Chicago,  New  York,  and 
Liverpool  have  formed  one  market  for  the  exchange  of 
wheat  ever  since  the  electric  telegraph  brought  these 
places  into  such  close  communication  that  the  daily  quo- 
tations must  be  practically  the  same,  allowance  being 
made,  of  course,  for  the  cost  of  transporting  grain  to  the 
Atlantic  seaboard  and  across  the  ocean.  In  general, 
wholesale  markets  of  staple  commodities  are  now  of 
national  or  international  extent  because  modern  methods 
of  communication  insure  the  closest  intercourse  between 
dealers  in  distant  places,  and  make  it  possible  for  uniform 


lOd  THE  TMEORV  OE  EXCHAI^GE 

prices  to  prevail  over  wide  areas.  In  retail  trade,  Upon 
the  other  hand,  prices  not  only  vary  from  one  city  to  an- 
other, but  are  not  likely  to  be  uniform  in  all  parts  of  a 
single  city  of  any  considerable  size.  This  is  because 
retail  buyers,  i.e.,  the  final  consumers,  do  not  take  the 
trouble  to  watch  prices  over  wide  areas  of  country,  but 
purchase  from  local  dealers  at  such  prices  as  are  asked. 

The  existence  of  a  market,  it  will  be  observed,  in  which 
the  same  product  exchanges  at  a  uniform  price,  presup- 
poses  the   condition   of   competition.     In   the 

Competition. 

widest  sense  of  the  term,  competition  denotes 
ai.y  struggle  of  conflicting  interests  in  which  each  person 
endeavors  to  accomplish  his  own  ends  in  the  face  of 
similar  efforts  upon  the  part  of  rivals.  In  a  market, 
competition  may  mean  either  one  of  two  things.  It  may 
mean  the  endeavor  of  rival  sellers  to  dispose  of  their  goods 
or  services  on  the  best  possible  terms;  and,  on  the  other 
hand,  the  efforts  of  rival  buyers  to  purchase  goods  at  the 
best  advantage.  Or,  in  the  second  place,  it  may  mean 
the  process  of  bargaining  between  buyers  and  sellers  for 
the  best  terms  in  each  transaction.  Where  there  are  many 
buyers  and  many  sellers,  competition  between  rival  sellers 
on  the  one  hand  and  rival  buyers  on  the  other  will  usually 
establish  a  uniform  price  without  any  bargaining  between 
buyers  and  sellers.  In  fact,  much  bargaining  between 
buyers  and  sellers  is  likely  to  break  the  body  of  traders 
up  into  groups  and  to  destroy  uniformity  of  prices. 

§  59.   We  are   now  ready   to   consider  the   causes  by 
Market  which  value  is  determined,  and  shall  find  it 

^*^"®"  convenient  to  begin  with  the  problem  of  mar- 

ket value.     During  a  recent  yeai  the  prices  commanded 


MARKET  VALUE  101 

by  a  bushel  of  wheat  in  New  York  ranged  from  fifty- 
six  to  eighty-three  cents,  and  were  seldom  exactly  the 
same  on  any  two  successive  days.  These  fluctuating 
daily  quotations  were  the  market  prices  of  that  commod- 
ity; and  they  measured  the  market  value,  which  may  be 
defined,  as  the  actual  exchange  power  of  a  commodity  in 
a  market  from  day  to  day. 

Investigation  of  the  manner  in  which  market  value 
is  determined  will  demonstrate  that  it  depends  upon  the 
forces  of  demand  and   supply.     By  demand, 

.        Demand. 

as  we  have  seen,  the  economist  means  desire 
coupled  with  the  ability  to  purchase.  It  is  small  when 
buyers  will  take  but  a  small  amount  of  a  commodity  out 
of  the  market,  and  large  when  a  greater  quantity  is  bought. 
Our  study  of  the  consumption  of  wealth  has  already 
enabled  us  to  formulate  a  general  law  of  demand ;  and 
it  was  shown  that  demand  varies-^  directly  as  the  marginal 
utility  of  a  commodity,  and  inversely^  as  its  price. 

The  supply  of  commodities  in  a  market  must  be  dis- 
tinguished clearly  from  the  stock  of  goods  which  pro- 
ducers   or    middlemen    have    on    hand.     The 

Supply. 

Stock  is  the  entire  quantity  of  goods  under  the 
control  of  the  sellers,  while  the  supply  is  the  amount  that 
will  be  offered  for  sale  at  a  given  price.     The  stock  is  in 
the  hands  of  men  who  have  produced  or  purchased  it 

'  Since  we  are  now  studying  the  value  of  a  commodity  for  short  periods 
of  time,  we  may  omit  the  third  factor  mentioned  in  the  previous  chapter, 
viz.,  changes  in  the  resources  of  consumers. 

2  The  words  "directly"  and  "inversely"  are  not  einplDVcd  here  in 
their  strict  mathematical  meaning.  Demand  increases  as  utility  increases, 
but  not  necessarily  in  the  same  proportion ;  it  varies  as  price  varies,  but 
not  jiroportionately. 


I02       THE   THEORY  OF  EXCHANGE 

for  the  sole  purpose  of  selling  at  a  profit;  these  holders, 
in  fact,  could  have  no  conceivable  use  for  any  considerable 
part  of  their  stock  for  purposes  of  personal  consumption. 
They  will  offer  for  sale  from  day  to  day  so  much  of  the 
stocks  as  they  consider  it  desirable  to  sell  at  existing  prices. 
High  prices  will  induce  them  to  throw  large  quantities 
of  goods  into  the  market ;  while,  if  prices  are  low,  smaller 
quantities  will  be  offered  for  sale,  and  the  remainder  of 
the  stock  reserved  until  the  market  improves. 

§  60.  Within  a  market  at  a  given  time,  the  price  of  a 
commodity  will  be  fixed  at  a  point  where  demand  and 
Market  value  supply  wiU  be  equahzcd.  Let  us  suppose 
sSppiyand  ^hat  Sellers  of  wheat  have  on  their  hands  a 
demand.  stock  of  1,000,000  bushcls )    that,   at  a  price 

of  eighty  cents  per  bushel,  they  will  sell  the  entire  stock; 
that  a  price  of  seventy  cents  will  induce  them  to  place 
800,000  bushels  upon  the  market;  and  that  a  price  of 
sixty  cents  would  reduce  their  offerings  to  600,000  bushels. 
Upon  the  other  hand,  we  may  assume  that  the  buyers 
will  purchase  1,000,000  bushels  of  wheat  at  sixty  cents; 
800,000  bushels  at  a  price  of  seventy  cents;  and  600,000 
at  a  price  of  eighty  cents.  It  is  evident  that,  under  such 
conditions,  a  price  of  seventy  cents  will  equalize  supply 
and  demand;  and  a  Httle  reflection  will  show  that  this 
must  be  the  ruling  price  for  the  day,  since  competition 
of  buyer  with  buyer  and  of  seller  with  seller  will  make  no 
other  result  possible.  If  the  bidding  by  some  buyers 
should  raise  the  price  to  seventy-one  cents,  others  would 
reduce  their  purchases  or  retire  from  the  market,  so  that 
the  demand  would  quickly  fall  from  800,000  bushels  to 
some  such  figure  as  790,000.     At  the  same  time  the  addi- 


NORMAL    VALUE  I03 

tion  of  one  cent  to  the  price  would  increase  the  offerings 
so  that  the  supply  might  rise  to  810,000  bushels.  Such 
a  situation  would  make  it  impossible  for  dealers  who 
are  anxious  to  sell  20,000  bushels  to  find  a  customer  for 
their  wheat,  and  would  lead  some  of  them  to  lower  the 
price  to  seventy  cents.  Where  competition  exists,  the 
demand  and  the  supply  must  be  equalized. 

§  61.  In  our  chapter  upon  the  consumption  of  wealth 
it  was  shown  that  commodities  differ  very  greatly  in  the 
sensitiveness  with  which  the  demand  for  them  Elasticity 
responds  to  changes  in  price.  Articles  for  0*  "demand, 
which  the  demand  is  inelastic  must  rise  in  price  materi- 
ally before  consumers  will  reduce  their  purchases  con- 
siderably; and,  therefore,  a  shortage  in  the  supply  will 
increase  prices  very  much  more  than  would  be  possible 
if  the  demand  were  elastic.  Upon  the  other  hand,  if  the 
stock  is  greatly  increased,  the  sellers  must  reduce  their 
price  considerably  before  they  can  dispose  of  materially 
larger  quantities.  We  learned  also  that,  if  hard  times 
compel  the  consumers  to  retrench  in  their  expenditures, 
the  prices  of  articles  with  an  elastic  demand  will  suffer 
much  earlier  and  more  extensively  than  the  prices  of  the 
other  class  of  goods. 

III.   Normal  Value 

§  62.   Although  market  values  arc  constantly  changing, 
an  underlying  force  controls  ultimately  all  such  fiuctua- 
tions.     Experience    shows    that    an    unusually  Normal 
high  price  is  not  likely  to  be   maintained  for  ^^•"*- 
a  long  time,  and  that  exceptionally  low  prices  are  equally 
'jnstablc.     Moreover,  if  we  comn^'—  the  average  market 


104       THE  THEORY  OF  EXCHANGE 

prices  for  a  considerable  period,  we  shall  find  that  the 
relative  prices  of  different  commodities  remain  tolerably 
constant,  so  long  as  no  important  changes  occur  in  the 
uses  to  which  they  are  put  or  the  conditions  of  produc- 
tion. Some  force,  evidently,  sets  a  limit  to  the  fluctua- 
tions of  the  market,  and  restores  prices  continually  to 
what  the  business  world  considers  a  normal  level;  in 
other  words,  there  is  a  certain  point  around  which  market 
prices  play.  In  this  way  we  arrive  at  the  concept  oi 
normal  value  or  price,  which  may  be  defined  as  that  value 
or  price  to  which,  under  given  conditions,  market  prices 
constantly  return. 

§  63.    Commodities    are   produced   by    capitalists    and 

laborers  who  desire  to  secure  the  largest  possible  returns 

for  the  sacrifices  incurred  in   the   process  of 

The  force  _  ^ 

governing        production.     In  SO  far  as  they  have  the  power 

normal  value.        ^      .      .  •n  i 

of  choice,  producers  will  endeavor  to  invest 
their  labor  and  capital  in  those  occupations  which  promise 
them  the  best  income  from  their  exertions;  and  here  we 
discover  a  force  that  tends  to  increase  or  restrict  the  stock 
of  any  commodity,  and  thus  to  affect  the  movement  of 
prices.  If  two  articles  that  require  the  same  amounts 
of  sacrifice  for  their  production  happen  to  have  different 
values  in  the  market,  producers  will  increase  the  supply 
of  that  article  which  commands  the  higher  price,  and 
restrict  the  output  of  the  other.  The  increased  produc- 
tion of  the  dearer  article  will  gradually  lower  its  market 
value  to  the  level  of  the  other  one  representing  the  same 
expenditure  of  labor  and  capital.  In  this  manner  the 
cost  of  production  influences  the  supply,  and  therefore  the 
price,  of  commodities. 


NORMAL    VALUE  IO5 

The  competition  of  the  market,  by  which  prices  are 
regulated  from  day  to  day,  has  been  called  ^''commercial 
competition'''' ;  and  to  the  competition  of  pro-  industrial 
ducers  who  endeavor  to  regulate  production  competition. 
according  to  the  demands  of  the  market,  the  term  ''indus- 
trial competition^^  has  been  apphed.  It  is  important  for 
us  to  examine  the  actual  processes  by  which  this  indus 
trial  competition  operates.  In  case  any  industry,  on 
account  of  the  high  prices  now  received  for  its  products, 
becomes  exceptionally  profitable,  many  employers  already 
engaged  in  it  will  be  stimulated  to  enlarge  their  present 
plants;  while  outside  capitalists,  seeing  an  opportunity 
to  make  large  profits,  will  establish  new  enterprises.  In 
a  progressive  country,  in  every  prosperous  year,  there 
is  a  large  mass  of  accumulated  profits  which  seeks  invest- 
ment; and,  besides,  it  is  possible  to  withdraw  from  the 
least  profitable  industries  considerable  capital  that  is  not 
too  highly  specialized,  and  employ  it  where  it  will  secure 
a  better  return.  On  the  other  hand,  if  the  market  price 
of  any  commodity  has  fallen  to  such  an  extent  that  pro- 
ducers are  confronted  with  the  prospect  of  small  profits, 
or  even  loss,  employers  will  begin  to  operate  their  factories 
upon  half  time  or  will  close  their  doors  and  wait  for  con- 
ditions to  improve.  Some  establishments,  under  such 
conditions,  arc  likely  to  fail,  and  the  capital  invested  in 
them  is  thereby  removed  from  the  field;  while  a  few  may 
find  it  possible  to  transfer  a  part  of  their  free,  or  relatively 
free,  capital  to  some  more  profitable  enterprise.  The 
burden  of  "hard  times"  falls  most  heavily  upon  the 
marginal  producers,  who,  as  we  learned  in  the  last  chapter, 
have  been  producing  at  the  greatest  expense;    and  it  is 


I06       THE  THEORY  OF  EXCHANGE 

chiefly  through  the  failure  or  vohmtary  withdrawal  of 
such  establishments  that  the  supply  is  reduced  to  a  quan- 
tity that  can  be  marketed  at  a  profit. 

It  appears,  therefore,  that,  just  as  the  marginal  utility 
determines  the  demand  for  commodities,  so  the  cost  of 
Cost  of  production    regulates   the   supply.     We    must, 

production.  ^^^^^^  undertake  a  careful  analysis  of  the  dif- 
ferent elements  that  enter  into  the  cost  of  production, 
and  must  inquire:  What  things  do  individual  producers, 
both  capitalists  and  laborers,  sacrifice  in  order  that  the 
work  of  production  may  be  carried  on? 

§  64.  In  the  first  place,  it  should  be  observed,  the  natu- 
ral agents  utilized  in  production  are  not,  under  ordinary 
circumstances,  an  element  in  determining  the 

Analysis  '  ° 

of  cost  of      ■  cost.-^    Such  agents  are  a  part  of  nature's  contri- 

production.  .  .  i        i-    i 

bution ;  they  do  not  mcrease,  but  rather  lighten, 
the  sacrifices  that  producers  undergo.  What  production 
really  costs  to  the  persons  who  carry  it  on  is  the  sacrifice 
of  the  labor  and  capital  required  for  the  creation  of  utilities. 
The  first  element  in  producers'  cost  is  the  labor  devoted 
First  eie-  to  production.  It  may  be  expended  indirectly 
ment:  Labor.  -^  ^^  manufacture  of  capital  needed  in  an 
industry,  or  directly  in    the    production    of   consumable 

^  If  the  supply  of  any  material,  such  as  copper,  is  monopolized,  then 
those  who  control  the  mines  may  exact  a  large  monopoly  profit  over  and 
above  the  cost  of  production.  This  monopoly  profit  becomes  an  element 
in  the  cost  of  production  in  all  industries  that  use  copper.  We  are  now 
studying  competitive,  not  monopoly,  prices,  and  will  not  pursue  this  sub- 
ject further.  In  the  case  of  land,  which  ordinarily  commands  a  rent,  it 
might  seem,  at  first  thought,  that  this  rent  must  be  an  element  in  the  cost 
of  production.  It  is,  of  course,  an  item  of  expense  to  the  producer,  but 
we  shall  see  that  it  is  not  one  of  the  factors  determining  the  normal  value. 
Phis  will  be  made  clearer  waen  we  come  to  the  discussion  of  rent. 


NORMAL    VALUE  IO7 

commodities.  The  sacrifice  which  labor  represents  is 
in  all  cases  the  cost  of  supplying  the  required  number 
of   workmen. 

Laborers  are  divided  into  various  classes  or  grades, 
each  of  which  possesses  its  own  standard  of  living;  and. 
in  proportion  as  the  standard  is  high  or  low,  the  cost  of 
supplying  any  particular  sort  of  labor  will  be  larger  or 
smaller.  Workmen  suitably  trained  to  undertake  delicate 
and  responsible  tasks  cannot  be  had  unless  the  remunera- 
tion is  high  enough  to  cover  the  cost  of  rearing  and  edu- 
cating such  persons.  On  the  other  hand,  work  that  calls 
for  no  skill  and  places  no  responsibility  upon  the  laborer 
can  be  done  by  persons  whose  standard  of  living  is  the 
lowest,  and  represents,  as  these  things  go,  a  small  labor 
cost.  So  far  as  the  element  of  labor  is  concerned,  the 
cost  of  producing  a  commodity  depends  upon  the  standard 
of  living  of  the  class  of  workmen  which  the  industry 
requires.^ 

The  second  element  in  producers'  cost  is  the  expenditure 
of  capital.  In  so  far  as  capital  represents  mere  labor 
devoted      to      the      production      of  buildings, 

.   '  "  '    Second 

machines,  or  materials,  tlie  sacrifice  occasioned   element: 

by  its  use  has  been  fully  accounted  for  in  the 

previous   paragraph.     But,   as   has   been   explained   else- 

'  Where  there  is  a  practicable  alternative  iox  the  laborer,  the  cost  oi 
ohtaininjj  his  services  may  be  influenced  by  one  or  two  other  factors. 
Work  that  is  held  in  low  social  esteem  will  be  avoided,  unless  the  remun- 
eration is  somewhat  more  than  enough  to  equal  the  standard  of  living  of 
laljorers  of  the  grade  required.  So,  too,  work  that  involves  risk  of  life  or 
liml)  must  be  more  highly  remunerated.  This  is  true,  however,  only  when 
workmen  have  practical  freedom  of  choice.  Much  unpleasant  work,  or 
work  that  is  danger<jus  to  health  or  to  limb,  is  performed  by  men  who 
receive  the  lowest  wages,  because  there  is  no  practicable  alternative. 


I08       THE  THEORY  OF  EXCHANGE 

where  (§  29),  the  formation  and  renewal  of  capital  require 
abstinence,  or  waiting,  as  well  as  labor;  and  in  this  we 
find  a  second  element  of  sacrifice,  independent  of  labor. 
This  is  not  to  say  that  every  portion  of  a  given  stock  of 
capital  represents  the  same  amount  of  sacrifice  because,  as 
we  have  seen,  millionaires  can  accumulate  capital  far  more 
easily  than  persons  with  small  incomes.  But  it  does  mean 
that  every  unit  of  capital  represents  a  sacrifice  of  the  pres- 
ent to  the  future;  and,  therefore,  involves  something  more 
than  the  mere  expenditure  of  labor  in  producing  it.^ 

§  65.   The  problem  of  normal  value  is  somewhat  com- 
plicated by  the  fact  that  the  cost  of  producing  any  com- 
moditv  is  not  the  same  in  all  establishments 

Different  •' 

costs  of  pro-     (§  52).     Does  the  normal  value  of  a  commodity, 

duction.  1111 

then,  depend  upon  the  average  cost  of  produc- 
tion, upon  the  lowest  cost,  or  upon  the  highest?     The 

1  A  simple  illustration  will  make  evident  the  reality  of  the  sacrifice 
represented  by  waiting.  Suppose  that  five  men,  each  furnishing  his  own 
tools  and  subsistence,  undertake  to  make  a  boat  that  cannot  be  completed 
in  less  than  five  months.  When  finished,  the  boat  will  be  worth  ;^2000. 
If  all  the  men  wait  until  the  boat  is  completed  and  sold,  they  may  each  re- 
ceive ;?400,  assuming,  for  convenience,  that  their  labor  has  been  of  the 
same  value.  But  now  suppose  that  one  of  the  men,  instead  of  waiting  five 
months  for  his  share  of  the  product,  demands  that  the  others  advance 
$400  to  him  at  the  end  of  the  first  month.  He  would  quickly  be  told  that, 
since  nothing  was  to  be  realized  from  the  undertaking  for  five  months,  he 
could  not  expect  to  share  equally  with  his  companions  in  the  distribution 
of  the  $2000  then  available  unless  he  would  wait  until  the  boat  was  com- 
pleted and  sold.  He  would  not  be  given  at  the  end  of  one  month  even 
one  fifth  of  the  ^400  that  would  be  due  him  at  the  end  of  five  months. 
For  him  to  receive  advances  of  $80  at  the  end  of  each  of  the  first  four 
months  would  result  in  an  unequal  distribution  of  the  sacrifice  represented 
by  waiting.  He  might,  however,  justly  receive  at  the  end  of  one  month 
the  present  worth  of  the  ^80  which  would  be  due  for  that  month's  labor 
when  the  boat  had  been  completed. 


NORMAL   VALUE  lOQ 

answer  must  be  that  it  is  governed  by  the  highest,  or 
marginal,  cost  of  production.  If  the  amount  of  wlieat 
normally  consumed  in  any  community  is  1,000,000  bushels, 
the  price  must  be  high  enough  to  cover  the  cost  of  pro- 
duction upon  the  poorest  land  that  needs  to  be  cultivated 
in  order  to  obtain  so  large  a  supply;  for  otherwise  such 
lands  would  go  out  of  cultivation,  the  supply  would  fall 
below  1,000,000  bushels,  and  the  price  would  be  restored 
to  the  higher  figure.  The  same  thing  is  true  in  manu- 
factures, or  any  other  industry;  consequently  consumers 
must  normally  pay  enough  to  cover  the  cost  of  producing 
the  marginal  unit  of  the  supply.  Moreover,  competition 
between  producers  will  not  permit  the  price  to  be  main- 
tained for  long  above  the  point  just  indicated.  If  prices 
rise  above  the  normal  level,  poorer  lands  and  inferior 
factories  can  be  brought  into  use,  the  supply  will  increase, 
and  competition  among  producers  will  reduce  prices  to 
the  former  status.  Under  competition,  therefore,  the 
point  around  which  market  prices  play  is  the  marginal 
cost  of  production. 

Between  the  lowest  cost  of  production  to  the  most  skill- 
ful or  the  best  situated  producer  and  the  marginal  cost, 
the  difference  will  be  greater  in  some  industries 

°     _  The  extent 

than  in  others.     In  agriculture  the  product  of  of  these 

diff6r6iiC6S 

any  given  tract  cannot  be  increased  beyond 
a  certain  fjoint  except  under  conditions  of  diminishing 
returns;  so  that,  if  the  supply  of  any  product  is  to  be 
enlarged  very  greatly,  it  will  be  necessary  to  bring  into 
cultivation  one  grade  of  inferior  land  after  anotlicr,  with 
the  result  that  the  marginal  cost  of  production  is  likely 
to   rise  far  above  Lhe  cost  upon  the  most  fertile  lands- 


1 10  THE  THEORY  OF  EXCHANGE 

In  manufactures  and  commerce,  on  the  other  hand,  the 
product  that  can  be  obtained  from  any  piece  of  land  can 
be  largely  increased,  and  it  is  easier  to  secure  economies 
from  concentrating  production  in  large  estabhshments ; 
so  that  there  is  less  reason  for  great  differences  between 
the  costs  incurred  by  the  various  competitors. 

It   has   ^ow  been  shown   that   market  value  depends 

primarily  on  the  marginal  utility  of  a  given  supply  of  any 

commodity,  and  that  normal  value,  to  which 

Marginal  cost  ■'  \ 

the  determin-  the  fluctuations  of  the  market  must  conform, 

ing  factor.         .  .  ... 

IS  governed  by  the  margmal  cost  of  production. 
If  the  market  price  is  the  one  that  equalizes  supply  and 
demand  at  any  particular  time,  the  normal  price  is  the 
one  that  will  equalize  production  and  consumption. 
"Value,"  says  Professor  Marshall,  "rests  like  the  key- 
stone of  an  arch,  balanced  in  equilibrium  between  the 
contending  pressures  of  its  two  opposing  sides.  The 
forces  of  demand  press  on  the  one  side,  those  of  supply 
on  the  other."  ^ 

§  66.   In  this  discussion  we  have  assumed  that  buyers 

and   sellers,    consumers   and   producers,    are   conducting 

^  their  affairs  with  full  knowledge  of  the  demands 

Importance  of  '-'  _ 

theory  of         of  the  market  and  of  the  conditions  of  pro- 

normal  value.  . 

duction;  and  we  have  assumed,  furthermore, 
that  absolute  freedom  of  competition  has  prevailed.     It 

1  The  following  illustration  may  make  the  theory  of  normal  value  some- 
what clearer.  Suppose  that  the  movements  of  market  prices  shovi'  that 
consumers  will  buy  100,000  tons  of  pig  iron  at  $20  per  ton,  and  that  their 
purchases  will  increase  to  300,000  as  the  price  gradually  falls  to  %\o. 
Suppose  that  the  best  situated  furnace  can  supply  50,000  tons  at  a  price 
of  $\o,  and  that  other  furnaces  can  supply  additional  amounts  at  prices 
that  gradually  increase   until  300,000  tons  would  come  into  the  market 


NORMAL    VALUE 


III 


is  needless  to  say  that  such  conditions  are  realized  only 
imperfectly  in  the  actual  world  of  business,  and  that  prices 
cannot  always  be  determined  in  the  manner  which  has 
been  described.  This  fact  must  be  taken  into  account 
before  we  dismiss  the  subject  of  value,  and  in  the  next 
part  of  this  chapter  will  receive  careful  consideration. 
But  when  all  such  qualifying  circumstances  are  given 
due  weight,  it  remains  true  that  our  theory  of  normal 
value  possesses  the  highest  theoretical  and  practical  im- 
portance. It  is  based,  in  fact,  upon  a  study  of  underlying 
forces  that  no  economist  or  man  of  business  can  afford 
to  neglect. 

if  the  quotations  should  rise  to  $20.  Then  the  following  table  may 
show  where  the  price  must  be  fixed  in  order  to  adjust  production  to 
consumption :  — 


Demand 

Supply 

Price 

Tons  Bought 

Price 

Tons  Produced 

JS20 

100,000 

$20 

300,000 

Ig 

1 50,000 

18 

250,000 

16 

200,000 

16 

220,000 

15 

220,000 

i; 

200,000 

H 

230,000 

14 

180,000 

13 

240,000 

13 

I  70,000 

12 

250,000 

12 

1 50,000 

10 

300,000 

10 

100,000 

(Ji/der  such  conditions  the  normal  price  would  be  somewhere  between 
Si 5  and  5i6.  Perhaps  a  price  of  Si 5.50  would  reduce  the  demand  to 
210,000  tons,  and  increase  the  supply  to  precisely  this  figure.  Observe 
that  the  diffcrL-nccs  between  the  lowest  and  the  marginal  cost  increase  as 
the  supply  is  enlarged. 


112       THE  THEORY  OF  EXCHANGE 

IV.   Exceptions  to  the  Theory  of  Normal  Value 

§  67.   It  is  now  necessary  to  consider  a  number  of  cases 

in  which  values  do  not  conform  to  the  laws  which  have 

just  been  explained.     Some  of  these  may  be 

taxation.        dismisscd  with    the  mere    mention.     Custom, 

monopoly.  . 

tor  mstance,  often  deters  buyers  from  com- 
peting vigorously  with  retail  dealers  in  the  purchase  of 
ordinary  articles  of  consumption;  so  that  retail  prices, 
in  the  absence  of  this  competition,  diverge  widely  from 
the  normal  level.  Taxes  that  are  levied  upon  a  few  com- 
modities, such  as  beer,  spirits,  or  tobacco,  increase  the 
expense  of  production  above  the  level  represented  by  the 
labor  and  productive  capital  employed.  And  finally,  the 
establishment  of  a  monopoly  gives  to  producers  the  power 
to  raise  prices  far  above  the  cost  of  production.  This 
subject  of  monopoly,  however,  will  require  a  separate 
chapter. 

§  68.  An  important  class  of  exceptions  arises  from 
the  fact  that  producers,  especially  laborers,  are  not  always 
Failure  of  ^^ec  to  choosc  the  occupations  that  they  enter. 
competition.  Unskilled  laborers  can  engage  only  in  the 
humblest  callings;  skilled  workmen  lose  the  benefit  of 
their  acquired  dexterity  if  they  abandon  the  crafi.  for 
which  they  are  trained;  and  poverty  or  ignorance  fre- 
quently prevents  men  from  moving  to  the  places  where 
their  labor  would  be  in  the  greatest  demand.  In  all  such 
cases  there  may  be  little  freedom  of  choice,  and  laborers 
may  be  obliged  to  turn  to  anything  that  offers,  with  the 
result  that  there  is  a  failure  to  realize  perfect  competition. 
Value  cannot  be  adjusted  to  the  cost  of  production  unless 


EXCEPTIONS  TO   THEORY  OF  NORMAL    VALUE     113 

producers  are  able  to  insist  on  getting  a  remuneration 
proportioned  to  the  sacrifices  incurred;  and  when  a  mass 
of  uaskilled  labor  can  be  had  at  "starvation  wages,"  a 
commodity  may  be  placed  in  the  market  for  less  than  its 
normal  price. 

§  69,  The  investment  of  vast  amounts  of  fixed  caoital 
in  modern  industrial  enterprises  has  introduced  into 
business  a  new  cause  of  disturbance  of  prices. 

\     _  The  effect  of 

A  large   fixed  capital   usually  is  a  specialized  large  fixed 

.      ....  ,  capitals. 

capital,  and  is  an  investment  that  cannot, 
without  great  or  even  total  loss,  be  withdrawn  from  the 
particular  line  of  business  to  which  it  is  expressly  adapted. 
Consequently,  whenever  prices  fall  below  a  figure  which 
will  pay  all  the  expenses  of  production  and  leave  a  fair 
profit,  the  managers  of  such  large  specialized  capitals  find 
themseh'es  in  a  pecuHar  position.  They  find  it  impos- 
sible to  go  out  of  the  business  without  incurring  enormous 
loss;  and  at  the  same  time  it  is  difiicult  to  curtail  produc- 
tion without  incurring  an  almost  equal  loss,  a  fact  which 
requires  further  explanation.  Speciahzed  capital  in  the 
form  of  buildings  and  costly  machinery  requires  constant 
attention  and  renewal,  and  oftentimes  machinery  depre- 
ciates very  rapidly  when  it  is  allowed  to  remain  idle. 
The  exj)cnscs  for  interest  and  replacement  of  fixed  capital 
continue  about  the  same  whether  an  establishment  does 
a  large  business  or  remains  idle.  Moreover,  insurance 
expenses  and  taxes  remain  about  the  same  through  dull 
times  as  through  good.  And  the  salaries  of  the  most 
valuable,  and  therefore  the  most  highly  paid,  employees 
may  also  be  nearly  the  same,  since  trained  superintend- 
ents and  highly  skilled  mechanics  are  not  always  discharged 


114  THE  THEORY  OF  EXCHANGE 

even  if  business  is  temporarily  suspended.  The  principal 
"variable  expenses,"  which  depend  upon  the  amount  of  the 
product  turned  out,  are  the  expenses  for  the  less  valuable 
kinds  of  labor  and  for  materials.  The  result  is  that  when 
prices  fall  below  a  point  at  which  they  yield  a  fair  profit 
to  the  producer,  the  managers  of  very  large  estabhshments 
will  not  promptly  reduce  the  product  which  they  turn 
out.  They  know  that  the  fixed  expenses  of  their  estab- 
lishments will  not  be  greatly  decreased  by  running  foi 
shorter  hours  or  by  temporarily  suspending  production. 
Each  manager  will  be  hkely  to  calculate  that  if  he  can  sell 
his  product  for  anything  more  than  enough  to  cover  the 
cost  of  materials  and  of  common  labor,  he  will  have  just 
so  much  toward  paying  the  fixed  charges ;  and  that  if,  on 
the  other  hand,  he  refuses  to  produce  at  the  lower  prices, 
he  will  not  be  earning  any  part  of  the  fixed  expenses.  The 
result  is  that,  w^herever  large  plants  exist,  a  fall  of  prices 
will  not  promptly  check  the  output  of  commodities,  since 
each  producer  may  endeavor  to  secure  something  toward 
paying  his  fixed  expenses,  even  if  he  is  obliged  to  sell  at 
a  price  which  little  more  than  covers  the  cost  of  materials 
and  common  labor.  Prices  may  remain  below  the  full 
cost  of  production  for  a  long  time  whenever  such  a  condi- 
tion of  affairs  exists. 

§  70.  We  must  consider  one  other  case  in  which  it  is 
difficult  to  trace  the  relation  between  value  and  costs. 
Products  and  This  occurs  in  its  simplest  form  when  an  in- 
by-products.  ^ugtry  has  one  chief  product  upon  which  efforts 
are  mainly  concentrated,  but  also  turns  out  a  by-product. 
Thus,  cattle  may  be  raised  for  the  purpose  of  securing 
beef;  but  hides,  horns,  hoofs,  and  bones  may  be  obtained 


EXCEPTION'S  TO   THEORY  OF  NORMAL    VALUE     115 

as  by-products.  Similarly,  wheat  is  a  main  product,  and 
straw  a  by-product ;  or  illuminating  gas  is  a  principal 
product,  and  coke  a  by-product.  Under  such  circum- 
stances how  will  the  values  of  the  main  products  and  of 
the  by-products  be  adjusted?  The  general  principle  is 
that  the  combined  value  of  the  main  product  and  the  by- 
products will  approximate  the  total  cost  of  carr}'ing  on  the 
business.  Producers  will  endeavor  to  regulate  the  produc- 
tion of  joint  products  in  such  a  way  that  the  largest  total 
return  can  be  secured  from  the  sale  of  all  the  products. 
Usually  this  can  be  done  by  producing  all  the  principal 
product  that  can  be  sold  at  good  prices,  and  then  seUing 
the  by-products  at  any  prices  that  will  induce  consumers 
to  take  them  out  of  the  market.  If  the  price  of  the  prin- 
cipal product  rises,  production  will  be  increased,  larger 
stocks  of  by-products  will  be  secured,  and  their  price  will 
usually  have  to  be  lowered  in  order  to  dispose  of  them.  In 
all  cases,  however,  the  total  prices  of  all  products  will  con- 
form to  the  total  cost  of  production;  while  the  relative 
prices  of  the  different  products  will  be  determined  by  the 
relative  demand  of  the  market  for  each  commodity,  in 
the  quantities  furnished  by  the  business. 

FOR   SUPPLEMENTARY   STUDY 

General:  BuLLOCK,  Selected  Readings  in  Economics,  354-386; 
IIadlkv,  Economics,  64-96;  Marshall,  Economics,  401-570; 
Seagkr,  Introduction  to  Economics,  81-106;  Taussig,  Prin- 
ciples of  Economics,  Rk.  II. 


CHAPTER  VII 

MONEY   AND   CREDIT 
I.  Metallic  Money 

§  71.   The  earliest  exchanges  were  effected  by  barter. 

Each  party  to  a  transaction  traded  goods  that  had  httle 

utiHty  to  him  for  other  goods  that  had  more. 
Barter. 

But  in  the  direct  exchange  of  one  commodity  for 

another  there  are  serious  disadvantages.  A  horse  cannot 
be  bartered  for  a  cow  unless  each  party  to  the  exchange 
wishes  to  obtain  precisely  what  the  other  has  to  offer,  and 
such  a  coincidence  of  desires  does  not  often  exist.  Then, 
too,  many  commodities  are  not  divisible  into  fractional 
parts ;  although  three  hats  may  be  exchanged  for  a  coat, 
it  is  impossible  to  obtain  one  hat  by  offering  one  third  of 
a  coat  in  payment.  Again,  if  one  hundred  different  arti- 
cles are  continually  bartered  for  one  another,  they  may 
exchange  in  any  one  of  4950  combinations;  and  it  is 
necessary  for  traders  to  know  all  of  these  exchange  ratios 
if  they  would  avoid  being  cheated. 

§  72.  Gradually  men  devised  a  method  of  avoiding 
these  difficulties.  They  saw  that,  while  some  commodities 
The  origin  wcrc  demanded  only  upon  certain  occasions 
of  money.  qj.  y^der  Certain  conditions,  other  goods  were 
almost   invariably   in   demand,   and   were  acceptable   to 

u6 


METALLIC  MONEY  wj 

nearly  all  persons.  Among  hunting  tribes  skins  of  animals 
were  always  in  demand,  since  they  were  the  principal 
product  of  labor,  and  were  durable  and  useful  for  many 
purposes.  With  pastoral  peoples  cattle  and  sheep  possessed 
this  quality,  since  they  were  useful  in  very  many  ways  and 
any  person  could  without  trouble  add  them  to  his  herds. 
So,  among  the  American  Indians,  strings  af  wampum 
were  objects  of  general  desirability,  since  they  served  to 
gratify  a  universal  desire  for  ornament.  When  it  was 
found  that  any  commodity  was  always  in  demand,  a  way 
was  opened  by  which  the  difficulties  of  barter  could  be 
avoided.  If  a  man  possessed  corn  and  desired  to  exchange 
it  for  clothing,  he  need  no  longer  find  another  person  who 
desired  to  exchange  precisely  the  right  kind  of  clothing  for 
the  exact  amount  of  corn  offered.  He  would  find  it  advan- 
tageous to  accept  furs,  or  cattle,  or  any  universally  desir- 
able commodity  in  payment  for  his  corn ;  and  then  he  could 
easily  find  many  people  who  would  be  willing  to  exchange 
clothing  for  the  furs  or  cattle. 

In  this  manner  the  exchange  of  product  A  for  product 
B  is  broken  up  into  two  distinct  processes:  (i)  the  sale 
of  A  for  some  universally  acceptable  article,   „ 

,  Money  the 

C,  which  serves  as  a  medium  of  exchange;  and  medium  of 

,.  exchange. 

(2)  the  purchase  of  B  by  means  of  this  medium, 
C.  In  this  way  the  article  that  servTS  as  an  intermediary 
acquires  a  new  use.  Formerly  it  was  a  mere  commodity, 
valued  simply  as  an  object  of  personal  consumption;  now 
it  is  a  peculiar  commodity  which  has  acquired  the  addi- 
tional function  of  serving  as  a  medium  of  exchange.  Such 
a  commodity  is  money. 

§  73.   A  list  of  the  various  articles  that  have  been,  at 


-II 8  MONEY  AND   CREDIT 

different  times  or  places,  employed  for  this  purpose  could 
be  made  extremely  long.  Besides  cattle  and  furs,  rice, 
The  money  tea,  Salt,  tobacco,  dates,  cocoanuts,  grains, 
metals.  cowry  shells,  and  many  different  metals  have 

served  as  money.  In  time  the  metals  proved  to  be  superior 
to  other  commodities;  and,  in  the  end,  gold  and  silver 
displaced  the  baser  metals.  The  predominance  of  gold 
and  silver  has  been  due  to  a  number  of  reasons:  — 

(i)  The  beauty  of  the  precious  metals  made  them 
universally  desired  for  the  purpose  of  ornamentation. 

(2)  Being  difficult  to  procure,  they  had  a  very  high 
poM^er  in  exchange ;  so  that  small  amounts  of  them  would 
command  large  quantities  of  other  commodities,  v^hich  is 
another  way  of  saying  that  gold  and  silver  are  highly 
portable. 

(3)  They  are  durable  and  can  readily  be  distinguished 
from  other  substances.  They  are  highly  divisible  and 
malleable,  so  that  they  can  easily  be  converted  into  coins 
of  uniform  quality  and  weight, 

(4)  They  are  extremely  stable  in  value.  The  world's 
stock  of  gold  money,  bullion,  and  wares  may  be  estimated 
at  about  $13,000,000,000  at  the  present  day,  while  the 
annual  output  of  all  the  gold  mines  is  about  $450,000,000. 
The  result  is  that,  unlike  wheat  or  cotton,  the  value  of  gold 
is  but  slightly  affected  by  changes  in  the  amount  produced 
from  year  to  year;  so  that  the  yellow  metal  can  be  accepted 
for  commodities  or  services  with  confidence  that  the 
medium  of  payment  will  not  fluctuate  sharply  in  value 
from  one  season  to  another.  Moreover,  on  account  of  its 
portability,  the  value  of  gold  will  be  substantially  the  sa.me 
in  all  countries. 


METALLIC  MONEY  II9 

§  74.  At  first  the  precious  metals  circulated  by  weight, 
and  those  who  handled  them  were  obhged  to  provide 
means  of  testing  their  purity  and  determining 
their  weight.  Such  inconvenient  methods  were 
at  length  rendered  unnecessary  by  the  introduction  of 
the  process  of  coinage.  The  first  step  in  this  direction 
was  to  impress  upon  a  bar  or  ring  or  wire  of  the  metal  a 
stamp  certifying  to  the  weight  and  fineness,  and  this  work 
was  often  done  by  goldsmiths  upon  private  account. 
Gradually,  in  order  to  have  greater  security  and  uniform- 
ity, governments  assumed  exclusive  control  of  the  pro- 
cess, and  put  an  end  to  all  private  coinage.  Improvements 
in  the  art  finally  led  to  stamping  both  sides  of  the  coin  and 
milling  the  edges,  so  as  to  make  attempts  to  tamper  with 
money  as  difficult  as  possible;  and  the  designs  impressed 
upon  the  metal  were  made  delicate  and  intricate  in  order 
to  foil  counterfeiters.  Thus  with  a  well-developed  coin- 
age system,  money  passes  by  tale,  i.e.^  by  count;  and 
traders  need  no  longer  resort  to  weighing  in  order  to  avoid 
being  cheated. 

Free  coinage  exists  when  any  owner  of  bullion  has  the 
right  to  take  the  metal  to  the  mint  and  have  it  coined  into 
monev.     The  United  States,   for  instance,   at 

Free  coinage: 

the  present  time,  allows  the  free  coinage  of  gold  gratuitous 
but  not  of  silver.  No  inconsiderable  expendi- 
ture of  capital  and  labor  is  required  for  the  operation  of  a 
mint,  and  governments  have  often  thrown  upon  the  per- 
son who  presents  bullion  the  cost  of  converting  it  into  coin. 
In  the  United  States,  however,  no  charge  is  made  for 
coining  standard  gold  bullion,  i.e.,  bullion  that  is  nine 
tenths  fine:   so  that  the  coinage  of  gold  is  gratuitous,  M 


I20  MONEY  AND   CREDIT 

well  as  free.  Since  coinage  is  gratuitous,  the  amount  of 
bullion  coined  into  an  eagle  is  always  worth  $io;  and, 
since  the  eagle  contains  232.2  grains  of  fine  metal, 
the  mint  price  of  an  ounce  of  gold  is  $20.67^0^0-^  Ifj 
on  the  other  hand,  a  country  makes  a  charge  for  coinage, 
bulHon  will  be  worth  in  the  market  just  so  much  less  than 
coins  containing  the  same  amount  of  metal. 

Oftentimes,  governments  not  only  have  made  a  charge 
for  coinage,  but  have  exacted  more  than  is  required  to 
cover  the  cost  of  the  operation;  such  a  charge 
is  usually  called  seigniorage,^  and  is  collected 
by  withholding  part  of  the  bullion  brought  to  the  mint. 
In  former  centuries  many  of  the  sovereigns  of  Europe 
dehberately  debased  their  coins  by  abstracting  a  seignior- 
age of  from  ten  to  ninety  per  cent.  Modern  countries 
usually  debase  the  small  pieces  used  for  fractional  cur- 
rency ;  ^  but  do  this  by  purchasing  metal  upon  government 
account  and  converting  it  into  as  many  coins  as  it  seems 
desirable  to  make.  In  the  United  States  our  so-called 
standard  silver  dollar  has  become  a  debased  coin  on  ac- 
count of  the  progressive  fall  in  the  value  of  silver  since 
1873,*  and  our  fractional  silver  pieces  contain  still  smaller 

1  That  is,  an  ounce  of  fine  gold  will  make  two  eagles,  with  a  remainder 
of  67i'gTj  cents.  Of  standard  gold,  nine  tenths  line,  the  eagle  contains  258 
grains;    and  the  mint  price  of  standard  gold  is  ^i8.6o|  per  ounce, 

'^  A  charge  which  only  covers  the  cost  of  coinage  is  called  brassage, 

3  This  prevents  the  melting  up  of  such  coins,  since  the  metal  they  con- 
tain would  be  worth  less  than  their  face  value, 

*  The  silver  dollar  contains  371^  grains  of  fine  silver.  In  1873  this 
quantity  of  the  white  metal  was  worth  $1,003  in  gold;  in  1911  it  was 
worth  $0,417;  at  present  it  is  worth  about  $0.83.  The  half  dollar  con- 
tains only  i73'[*'o  grains.  Since  1873  the  government  has  coined  about 
565,000,000  dollars  from  siilver  purchased  on  its  own  account. 


METALLIC  MONEY  121 

proportionate  weights  of  fine   metal  than   the  standard 

dollar.     It  is  highly  important,  as  we  shall  learn,  that  a 

countr}''s  principal  coins  should  not  be  debased;    but  it 

is  convenient  to  debase  the  fractional  currency  in  order  to 

obhge  persons  who  wish  to  melt  or  export  money  to  select 

the  larger  pieces   which,   dollar  for  dollar,   cost   less  to 

coin. 

xA.fter  establishing  public  coinage  systems,  governments 

took  the  further  step  of  declaring  that  their  coins  should 

be  received  by  all  persons  in  the  payment  of 
1   1  T       1  •  111    ^^S*^  tender, 

debts,     in  this  manner  corns  are  made  a  legal 

tender,  and  must  be  accepted  in  discharge  of  all  obligations 
unless  by  special  contract  some  other  medium  of  settle- 
ment has  been  agreed  upon.  Thus,  in  the  United  States, 
all  our  gold  coins,  the  silver  dollar,  and  the  United  States 
notes  are  declared  a  legal  tender;^  but  the  courts  will 
enforce  contracts  that  call  for  payment  in  gold. 

§  75.  The  behef  is  sometimes  expressed  that  money 
originated  by  virtue  of  the  action  of  governments,  and  is, 
consequently,  purely  a  creature  of  the  law.  The  "flat" 
This  is  the  "fiat"  theory.  But  the  historical  *'''°^- 
fact  is  that  a  medium  of  exchange  was  established  solely 
by  the  acts  of  individuals,  and  that  governments,  for  a 
very  long  time,  had  nothing  to  do  with  its  development. 
At  a  later  date,  governments  instituted  coinage  systems, 
made  their  coins  receivable  at  the  public  treasury,  and 
finally  declared   them   a  legal  tender  for  private  debts. 

'  Fractional  coins  are  a  tenrler  only  for  small  sums,  and  national  bank 
notes  are  not  a  legal  tender.  The  United  States  issues  gold  and  silver 
certificates  against  coined  g.>ld  and  silver  actually  deposited  in  the  Treasury 
in  exchange  for  them;  these  certificates,  while  everywhere  acceptable,  art! 
nut  a  legal  tender. 


122  MONEY  AND   CREDIT 

Their  action  greatly  extended  the  usefulness  of  money,  but 
did  not  originate  it.  Money  was  at  first  a  mere  commodity 
which,  on  account  of  its  superior  desirabihty  and  conven- 
ience, obtained  general  currency  as  a  medium  of  pay- 
ment. 

§  76.  When,  however,  a  commodity  began  to  circulate 
as  money,  it  acquired  a  new  use,  a  peculiar  property, 
Conclusion:  which  thereafter  distinguished  it  from  all 
tionsof"*^  other  commodities.  Gradually,  also,  it  ac- 
money.  quired  other  functions.     It  came  to  serve  as 

a  value  denominator,  i.e.,  a  common  denominator  in 
which  the  exchange  values  of  all  other  things  are  expressed. 
Obviously  the  process  of  exchange  was  greatly  facilitated 
when,  instead  of  having  to  remember  all  the  ratios  in  which 
each  one  of  a  hundred  commodities  exchanged  for  each 
of  the  others,  traders  needed  simply  to  keep  informed 
concerning  the  hundred  prices  which  such  commodities 
would  command  when  exchanged  for  money.  Closely 
connected  with  this  second  function  of  money  is  a  third, 
that  of  serving  as  a  standard  for  deferred  payments.  In 
renting  lands,  or  in  agreements  for  loans  secured  by  mort- 
gages, and  in  similar  contracts,  it  is  necessary  to  arrange 
for  the  payment  of  obligations  at  distant  periods  of  time. 
Long-term  contracts  may  extend  for  periods  of  ten,  fifty, 
or  one  hundred  years;  and  it  is  highly  important  that  the 
medium  in  which  payments  are  made  should  be  as  stable 
as  possible.  For  such  purposes  neither  gold  nor  silver 
is  a  perfectly  satisfactory  standard,  although  the  former 
is  superior  to  the  latter.  In  fact,  it  seems  that  no  safe 
method  of  insuring  ideal  justice  in  deferred  payments  has 
y«t  been  devis«d.  ,      ,  . 


CREDIT  AND  ITS  INSTRUMENTS  123 

II.    Credit  and  its  Instruments 

§  77.  In  addition  to  money,  the  world  of  business  em- 
ploys various  instruments  of  credit  in  effecting  a  consider- 
able proportion  of  its  exchanges.  Credit  may  credit 
be  defined  as  the  power  to  obtain  commodities  ^^^^^ed. 
or  services  at  the  present  time  in  return  for  some  equivalent 
promised  at  a  future  date.  In  such  a  countr}'  as  the  United 
States  it  is  probable  that  more  than  two  thirds  of  all 
exchanges  are  effected  by  means  of  instruments  that 
evadence  some  sort  of  a  credit  transaction  and  serve  as 
proof  of  the  obligation  of  the  debtor  to  make  payment 
at  some  future  time. 

§  78.  By  means  of  book  credits  many  exchanges  are 
effected  without  the  use  of  money.  A  may  purchase  $200 
of  household  supplies  at  a  store  kept  by  B, 

^}  ^         ■'         '    Book  credits. 

while  B  receives  $180  of  farm  produce  from  A. 
At  the  end  of  a  quarter  the  whole  series  of  transactions, 
aggregating  $380,  may  be  settled  by  the  payment  of  the 
balance  of  $20  which  is  due  to  B. 

§  79.  A  second  instrument  of  credit,  the  promissory 
note,  sometimes  enables  payments  to  be  made  without 
the  employment  of  money.  The  payee,  or  the  Thepromis- 
person  to  whom  the  note  is  due  either  upon  ^orynote. 
demand  or  at  the  end  of  a  certain  time,  can  indorse  the 
note  and  thus  make  it  payable  to  a  third  person  to  whom 
he  may  happen  to  owe  money.  In  this  manner,  the 
promissory  note,  by  successive  indorsements,  may  have 
efTected  a  number  of  exchanges  before  it  is  finally  pre- 
sented for  payment  by  the  person  who  originally  drew  it. 

§  80.   A  check  is  an  order  which  a  person  draws  upon 


124  MONEY  AND  CREDIT 

his  banker,  directing  him  to  pay  a  certain  sum  to  the  order 
of  the  person  to  whom  the  check  is  payable,  or  to  the 
bearer.  Like  a  promissory  note,  it  may  pass, 
by  indorsements,  through  several  hands;  and 
it  may  be  the  medium  in  which  a  number  of  payments  are 
made  before  it  finally  reaches  the  banker  upon  whom  it  is 
drawn.  But  even  when  this  does  not  happen,  the  use 
of  checks  makes  it  unnecessary  to  employ  money.  Let 
us  assume  that  A  owes  B  $50,  that  B  owes  C  $50,  and  that 
C  owes  D  $50,  and  let  us  also  assume  that  the  four  men 
have  deposits  at  the  same  bank.  Then  A,  B,  and  C  may 
draw  checks  for  $50  payable  to  B,  C,  and  D,  respectively; 
and  in  due  time  B,  C,  and  D  will  deposit  at  the  bank  the 
checks  received  from  A,  B,  and  C.  Then  the  banker  will 
deduct  from  the  deposits  of  A,  B,  and  C  the  am.ounts  of  the 
checks  drawn  by  them,  while  he  will  credit  B,  C,  and  D 
with  the  amounts  of  the  checks  which  they  present.  The 
net  result  will  be  that  the  deposit  of  A  will  be  decreased 
by  $50,  the  deposits  of  B  and  C  will  remain  unchanged, 
and  the  deposit  of  D  will  be  increased  by  $50.  In  this  way, 
the  three  debts  may  be  paid  without  the  actual  use  of  any 
money. 

If  now  the  four  men  happen  to  keep  their  accounts 
with  different  banks,  the  checks  will  be  settled  between 
The  clearing  the  four  institutions.  In  cities  of  any  consid- 
system.  erable  size  this  work  is  performed  by  clearing 

houses.  The  customers  of  each  bank  deposit  with  it  the 
checks  that  they  receive,  and  are  credited  with  the  sums 
thus  represented;  then,  once  a  day,  the  bank  sends  to 
the  clearing  house  checks  drawn  upon  other  institutions. 
There  the  bank  finds  representatives  of  other  institutions 


CkEDiT  AiVD  ITS  /AtSTRi/MEiVTS  li^ 

who  are  ready  to  present  for  settlement  the  checks  drawn 
by  its  depositors.  If  one  bank  sends  to  the  clearing  house 
Sioo,ooo  of  checks  drawn  upon  other  institutions,  and 
finds  there  checks  to  the  amount  of  $90,000  drawn  upon 
itself,  it  will  receive  the  balance  of  $10,000  that  stands 
to  its  credit;  if,  on  the  other  hand,  the  checks  drawn  on 
the  bank  had  amounted  to  $110,000,  a  balance  of  $10,000 
would  have  been  due  to  the  clearing  house. 

Banks  located  in  different  cities  settle  their  mutual 
obligations  with  almost  equal  ease.  Country  banks  have 
agents,  or  banks  with  which  thev  correspond, 

_  °  '  _  '  r  5    Centraliza- 

in  the  nearest  clearing-house  city,  so  that  every  tionofbank 

clc^rincfs 

clearing  house  settles  accounts  for  a  consider- 
able territory  adjacent  to  it.     Then,  finally,  the  New  York 
Clearing  House  acts  as  a  central  clearing  station  for  the 
whole  country,  since  every  important    city  bank    corre- 
sponds with  some  institution  in  New  York  City.^ 

§  81.  A  bill  of  exchange,  also  called  a  draft,  is  a  written 
order  by  which  the  person  who  draws  the  instrument  directs 
a  second  person  'the  drawee)  to  pay  a  sum  of  xhewiiof 
money  to  a  third  person  (the  payee),  either  at  "•^^^"k® 
sight  or  after  a  certain  time.  Thus  if  A  owes  $100  to  B, 
and  B  owes  $100  to  C,  both  debts  can  be  canceled  if  B 
draws  a  bill  ordering  A  to  pay  $100  to  C  ;  while,  by  indorse- 
ment, C  can  use  the  instrument  in  settling  a  debt  of  $100 
owed  to  D.  Bankers  make  a  business  of  buying  bills  of 
exchange,  and  will  sell  to  any  debtor  a  bill  of  exchange 
with  which  he  may  settle  an  ()l)ligation  due  in  a  distant 

'In  191 8  the  total  exchanges  of  all  the  cl  -arinK  houses  of  the  United 
States  aggregated  $321,461,327,000,  of  which  the  clearings  at  New  York 
amounted  to  $174,524,000,000. 


t26  moMey  and  credit 

city.-^  In  this  way  evidences  of  debt  accumulate  in  the 
hands  of  bankers  in  various  cities;  and  the  bills  due,  say 
from  Nev^  York  to  Chicago,  can  be  used  to  offset  a  similar 
amount  of  bills  due  from  Chicago  to  New  York.  No 
money  need  be  sent  from  one  city  to  the  other  except  in 
payment  of  whatever  balances  may  be  due  upon  the  whole 
body  of  transactions. 

In  domestic  trade  payment  by  checks  has  to  a  consider- 
able extent  displaced  the  use  of  bills  of  exchange,  which, 
Foreign  bills  6%  or  sixty  ycars  ago,  were  the  ordinary  me- 
of  exchange,  (jjuj-^^  q{  payment  between  distant  places.  In 
foreign  dealings,  however,  the  bill  of  exchange  retains  its 
importance;  and  foreign  bills  will  require  somewhat  de- 
tailed study.  In  principle  they  are  precisely  like  domestic 
bills.  They  are  dealt  in  by  private  bankers  and  some  of 
the  larger  incorporated  banks.  If  New  York  has  been 
buying  more  goods  or  securities  from  London  than  English- 
men have  purchased  in  the  United  States,  New  York 
dealers  in  exchange  will  encounter  a  large  demand  for 
remittances  to  London  and  small  offerings  of  bills  drawn 
upon  Enghsh  creditors;  while  in  London  there  will  be 
heavy  offerings  of  bills  drawn  against  American  debtors 
and  a  small  demand  for  remittances  to  the  United  States. 
Such  conditions  make  it  probable  that  gold  will  have  to  be 
sent  to  England  sooner  or  later,  in  order  to  settle  the  bal- 
ance due  to  that  country;  and  exchange  will  be  said  to  be 
unfavorable  to  New  York  and  favorable  to  London. 

^  When  a  creditor  draws  an  order  upon  his  debtor,  the  debt  maybe  said 
to  be  "  drawn  for  " ;  when  the  debtor  buys  a  bill  to  remit  to  his  creditor,  the 
debt  is  "  remitted  for."  Tiiis  distinction  is  important  because  in  practice 
the  two  classes  of  transactions  are  called  by  the  same  name,  so  that  the 
beginner  is  often  confused. 


CREDIT  AND  ITS  INSTRUMENTS  127 

Meanwhile,  before  any  shipment  of  gold  occurs,  inter- 
esting developments  will  appear  in  the  rate  of  exchange. 
The  Enghsh  pound  sterling  is  worth  $4,866  of  The  rate  of 
our  money;  and  if  the  debts  due  to  England  e^c^^^nge. 
should  precisely  equal  those  due  to  the  United  States, 
bankers  could  settle  all  international  obligations  by  the 
mere  balancing  of  accounts  without  the  shipment  of  money, 
and  exchange  would  stand  at  par.^  When,  however,  ex- 
change becomes  unfavorable  to  New  York  on  account  of 
its  English  debts  exceeding  those  which  London  owes  in 
this  country,  dealers  will  raise  the  price  of  bills  above 
$4,866.  To  a  person  who  owes  money  in  London  they 
will  not  sell  a  draft  at  par,  because  of  the  prospect  of  having 
to  ship  gold  in  order  to  settle  for  all  obligations  that  they 
incur  for  remittances  to  London.  But  they  will  pay  rcore 
than  $4,866  to  any  person  who  offers  to  sell  them  a  bill 
drawn  upon  an  English  debtor,  since  every  such  bill  can- 
cels an  equivalent  amount  of  indebtedness  to  their  London 
correspondents,  and  reduces  the  balance  that  must  be 
remitted  in  gold.  For  this  reason  exchange  will  rise 
above  par  when  it  becomes  unfavorable  to  New  York.^ 

There  are  limits,  however,  to  a  rise  or  fall  in  the  rate  of 
exchange.  The  cost  of  shipping  gold  across  the  ocean 
is,  at  the  present  time,  not  far  from  two  cents  for  each 

1  This  means  that  $4,866  in  New  York  would  be  worth  the  same  as  a 
pound  in  London. 

2  In  a  similar  manner  exchange  falls  l)elow  par  when  trade  is  running 
in  favor  of  New  York.  Under  such  c<mdilions,  hills  drawn  upon  English 
debtors  are  abundant  and  will  command  a  lower  price;  while  remittances 
to  London  can  be  purchased  from  the  dealers  at  less  than  54-866,  since 
every  such  transaction  cancels  part  of  the  balance  which  London  owe! 
New  York,  and  reduces  the  shipments  of  money  to  the  United  States. 


128  MONEY  AND   CREDIT 

pound  sterling;  and  this  cost  fixes  certain  bounds  beyond 
which  exchange  cannot  move,  except  under  the  most  ex- 
traordinary circumstances.      If   the   rate  rises 

Limits  to  the 

fluctuation  above  $4,886,  It  becomes  as  cheap  tor  any 
one  to  settle  a  London  debt  by  shipping  gold 
as  by  purchasing  a  bill  of  exchange;  and,  accordingly, 
when  exchange  rises  to  this  figure,  exports  of  gold  may 
be  expected. 1  On  the  other  hand,  the  rate  cannot  fall 
below  $4,846  without  inviting  imports  of  gold  which  put 
an  end  to  the  decline.  Between  these  lower  and  upper 
limits,  exchange  fluctuates  according  to  the  conditions  of 
international  indebtedness. 

§  82.  Bank  notes  are  a  final  form  of  credit  instruments 
employed  in  facilitating  exchanges.  They  are  merely 
The  bank  promissory  notes  issued  by  a  bank  and  made 
""^^  payable    upon    the    demand    of    any    holder. 

Since  they  circulate  from  hand  to  hand  without  indorse- 
ment, and  are  payable  to  the  bearer  without  the  require- 
ment of  identification,  they  are  far  more  effective  as  a 
medium  of  exchange  than  any  of  the  other  instruments  of 
credit. 

III.   The  Laws  of  Money 

§  83.  The  laws  governing  money  now  claim  attention, 
and  we  may  consider  first  of  all  the  principle  that  deter- 

1  This  assumes,  of  course,  that  the  shipment  of  gold  is  not  impeded. 
In  August,  1914,  at  the  outbreak  of  the  European  War,  the  sharp  demand 
for  exchange,  combined  with  the  great  risk  of  shipping  gold,  caused 
sterHng  to  rise  to  $5.50  and  over. 

In  so-called  "triangular  operations,"  e.g.,  when  English  bankers  draw 
gold  from  New  York  to  pay  their  debts  in  Paris,  it  may  pay  to  ship  gold 
from  the  United  States  when  the  rate  is  as  low  as  $4-87i-  Even  four 
and  five  cornered  transactions  are  sometimes  effected. 


THE  LAWS   OF  MONEY  1 29 

mines  its  value.     If  gold  were  a  mere  commodity,  its  value 
would  depend  first  upon  its  marginal  utility  as   a  con- 
sumer's good  and  ultimately  upon  its  marginal  The  first 
cost   of  production.      But   it    has    acquired  a  ?he°vaiue 
peculiar  function,  that  of  serving  as  a  medium  of  money, 
of  exchange,  and  this  fact  complicates  the  forces  by  which 
its  value  is  determined. 

Obviously  the  value  of  money  will  always  be  measured 
by  the  number  of  commodities  that  it  will  command, 
rising  as  this  number  increases,  and  decreas-  Money  and 
ing  as  it  falls..  This  is  another  way  of  saying  p"*^^®- 
that,  when  prices  are  low  and  a  given  amount  of  money 
will  command  a  large  quantity  of  commodities,  the  value 
of  the  circulating  medium  is  high ;  and  that,  when  prices 
are  high  and  the  purchasing  power  of  money  is  small,  its 
value  is  low.  In  other  words  the  value  of  money  varies 
inversely  with  the  general  level  of  prices. 

§  84.  It  is  a  familiar  fact  of  experience  that  the  pur- 
chasing power  of  money,  i.e.,  the  general  level  of  prices, 
varies  materially  from  time  to  time.     Between  ^^ 

•'  Changes  in 

£850  and  1873  prices  rose  both  in  Europe  and  theieveiof 
in  the  United  States;    then,  for  a  period  of 
twenty-three   years,    they    steadily    fell,    until,    in    1897, 
another  upward  movement  began. ^    As  nearly  as  can  be 

1  In  measuring  movements  of  prices,  tables  of  index  numbers  are 
usually  employed.  The  average  price  of  each  one  of  a  large  number  of 
Commodities  is  ascertained  for  some  year  or  period  of  years,  and  this  is 
called  100  as  a  base  for  measuring  subsequent  movements.  If  one  hundred 
commodities  are  examined,  the  index  number  of  the  first  year  will  lie 
10,000,  Then  the  prices  for  each  commodity  for  subsequent  years  are 
computed  as  percentages  of  the  price  of  tlie  basic  year  or  years.  Thus  if, 
of  the  one  hundred  commodities,  twenty  rise  ten  per  cent  during  the  next 


I30  MONEY  AND   CREDIT 

ascertained,  the  purchasing  power  of  gold  decreased  about 
twenty  per  cent  between  1850  and  1870,  and  it  increased 
nearly  forty  per  cent  during  the  period  that  ended  in  1897. 
Since  1897  the  purchasing  power  of  gold  has  declined  by 
more  than  fifty  per  cent. 

§  85.  Fluctuations  in  the  value  of  money  are  to  be 
attributed  to  the  same  factors  that  govern  the  value  of 
The  demand  everything  else  —  the  forces  of  demand  and 
for  money.  supply.  All  of  the  exchanges  regularly  effected 
through  the  agency  of  money  ^  constitute  the  demand  for 
money,  a  demand  that  is  just  as  real  as  the  demand  for 
cotton  or  for  wheat.  Goods  are  produced,  under  modern 
conditions,  for  the  purpose  of  being  sold ;  and  all  commod- 
ities in  the  market  represent  a  demand  for  the  medium  of 
payment,  whatever  that  may  be.  To  a  very  considerable 
extent,  this  medium  of  payment  is  money;  and  it  is  evi- 
dent that  when  the  number  of  exchanges,  i.e.,  the  volume 
of  business,  is  large,  the  demand  for  money  will  increase ; 
while  if  the  volume  of  business  decUnes,  there  will  be  a 
decrease  in  the  demand  for  money. 

The  supply  of  money  depends  upon  the  number  of 
coins  in  circulation  and  the  rapidity  with  which  they  pass 
The  supply  from  hand  to  hand.  When  trade  is  brisk,  the 
of  money.  circulation  of  money  becomes  rapid,  and  the 
supply  is  really  increased  even  though  no  change  takes 
place  in  the  number  of  coins;  while  in  times  when  busi- 
ness is  depressed,  the  movement  slackens  and  the  supply 

year,  sixty  remain  unchanged  in  price,  and  twenty  fall  five  per  cent,  the 
index  number  for  the  year  will  be  io,ioo,  which  will  indicate  an  average 
rise  of  one  per  cent. 

^  In  a  subsequent  paragraph  we  shall  take  account  of  the  fact  that  many 
exchanges  ace  effected  by  means  of  credit. 


THE  LAWS  OF  MONEY  I31 

is  virtually  decreased.  Except  for  changes  in  the  condi- 
tion of  business,  the  rate  of  circulation  depends  upon  the 
habits  of  the  people  and  may  be  regarded  as  a  fixed  quan- 
tity; so  that  if  there  is  an  increase  or  decrease  in  the  num- 
ber of  coins,  it  is  safe  to  assume  that  the  supply  of  money 
is  increased  or  decreased,  unless  it  can  be  shown  that 
something  has  happened  to  retard  or  accelerate  its 
circulation. 

If,  now,  we  assume  that  the  supply  of  money  remains 
stationary,  and  that  the  volume  of  business  in  any  com- 
munity increases,  the  value  of  money  will  rise  on  account 
of  the  increased  demand  for  a  medium  of  pay-  Effects  of 
ment;  while  if  the  volume  of  business  declines,   ^^i°5^®*L 

'  '    demand  and 

the  value  of  money  will  fall.  In  the  first  case  supply, 
the  tendency  will  be  toward  lower  prices;  and,  in  the 
second,  prices  will  tend  to  rise.  But  if  the  demand  re- 
mains unchanged  and  the  supply  increases,  the  value  of 
money  must  fall,  which  means,  of  course,  that  prices 
become  higher.  And,  finally,  if  the  supply  of  money  is 
decreased,  its  value  tends  to  rise,  and  prices  will  fall  to  a 
lower  level. 

The  actual  operation  of  such  changes  is  seen  very  clearly 
whenever  there  occurs  a  variation  in  the  production  of 
gold.     For    instance,    in    California    in    1840, 

.  Illustrations. 

the  new  gold  increased  enormously  the  prices 
of  .shovels,  pans,  top-boots,  blankets,  bacon,  and  Hour  — 
the  commodities  needed  in  the  mining  camps;  and  then 
the  gold  found  its  way  to  the  East  in  payment  for  miners' 
supplies  purchased  in  the  leading  cities.  Within  five 
years  the  annual  gold  production  of  the  United  States  ad- 
vanced from  $1,000,000  to  $60,000,000,  and  the  rise  of 


1^2  MOMeV  AMiD  CRED/T 

prices  became  general  as  the  supply  of  money  steadily 
rose.i  When,  after  1870,  the  world's  gold  output  began 
to  dechne,  the  rise  of  prices  was  checked ;  and  before  long 
a  downward  movement  set  in.^  This  continued  until 
recent  years  when  the  effect  of  improved  methods  of  treat- 
ing ore  and  the  development  of  the  South  African  mines 
again  enlarged  the  output,  which  has  now  reached  propor- 
tions never  before  known.^ 

§  86.  We  must  now  consider  the  relations  that  exist  be- 
tween the  stock  of  money  and  the  quantity  of  the  money 
Gold  used  metal  used  in  the  arts.  As  a  consumption  good, 
in  the  arts.  j-j^^  marginal  utiHty  of  gold  depends  simply  upon 
its  usefulness  in  the  arts;  as  money,  its  marginal  utility 
depends  upon  the  general  level  of  prices,  i.e.,  its  purchas- 
ing power.  If  free  coinage  is  permitted,  it  is  obvious 
that  gold  bullion  will  be  converted  into  coin  when  the 
purchasing  power  of  the  metal  is  greater  than  its  marginal 

^  The  Californian  and  Australian  gold  discoveries  increased  the  world's 
output  prodigiously,  as  is  shown  in  the  following  table,  which  giver  t^w 
total  production  by  decades :  — 

1831-1840  =  $134,841,000 
1841-1850  =  ;^363,928ooo 
1851-1860  =  11,332,981,000 
*The  world's  total  output  decreased  by  decades,  as  follows: — 
1861-1870  =  $1,263,015,000 
1871-1880  =  $1,150,814,000 
1881-1890  =  $1,060,056,000 

Other  forces,  it  should  be  remarked,  were  operating  at  the  same  time  t« 

cause  a  decline  in  prices. 

^  By  ten-year  periods  the  production  of  gold  was  as  follows : 

1886-1895 $1,379,210,000 

1896-1905 $2,901,678,000 

1906-1915 $4,464,457,000 


THE  LAWS  OF  MONEY  I33 

Utility  as  a  consumption  good;  while  coin  will  be  melted 
up  into  bullion  when  the  conditions  are  reversed.  In  this 
way,  under  free  coinage,  the  marginal  utihty  of  gold  tends 
to  remain  about  the  same,  whether  the  metal  is  employed 
as  money  or  used  in  the  arts. 

§  87.  This  brings  us  to  the  question  whether  the  cost 
of  producing  gold  has  any  effect  upon  its  value;  and  it 
will  be  seen  that,  undoubtedlv,  such  an  influ- 

The  cost  of 

ence  may  come  into  play,  although  much  more  producing 
tardily  than  in  the  case  of  other  commodities. 
When  the  purchasing  power  of  gold  is  high,  prices  are 
low;  and,  therefore,  the  cost  of  operating  gold  mines  is  con- 
siderably reduced,  even  though  no  improvements  occur  in 
the  methods  of  production.  The  lower  cost  of  operation 
increases  the  profits  of  the  better  mines,  and  makes  it 
possible  to  work  poorer  mines  that  yield  inferior  grades 
of  ore  or  can  be  operated  only  at  a  larger  expense.  Thus 
the  output  tends  to  increase,  the  supply  of  gold  is  enlarged, 
and  more  coins  come  into  circulation,  tending  to  raise 
prices  and  to  reduce  the  purchasing  power  of  money. 
This  process  is  likely  to  continue  until  the  higher  prices 
increase  the  expense  of  operating  the  poorer  mines  suffi- 
ciently to  put  an  end  to  their  operation,  and  thus  check 
the  output  of  gold.  In  this  manner,  if  a  considerable 
period  of  lime  is  taken  into  account,  the  marginal  cost 
of  producing  gold,  i.e.,  the  cost  at  the  poorest  mines  in 
use,  influences  the  supjjly  and  hence  the  value  of  money. 
.But  the  adjustment  of  the  purchasing  power  of  gold  to 
the  marginal  cost  of  production  can  be  brought  about 
only  after  a  sufficient  number  of  years  have  elapsed  to 
enable   the   changed    conditions   of   output    to    influence 


134  MONEY  AND   CREDIT 

materially  the  supply  in  existence.  Thus,  to  take  the 
latest  example,  the  annual  production  of  gold  reached  its 
lowest  point  between  1881  and  1885,  when  it  averaged 
only  $99,116,000  per  year.  From  1886  to  1890  the  aver- 
age output  rose  slightly  to  $112,900,000,  without  affecting 
prices;  while  from  1891  to  1895  it  increased  to  $163,000,000 
without  checking  the  decHne  of  the  index  numbers.  After 
that,  however,  as  the  production  rose  to  an  annual  average 
of  $257,000,000  for  the  next  five  years,  a  rise  of  prices 
began;  and  the  purchasing  power  of  gold  is  likely  to 
show  a  continued  decline  as  long  as  the  output  remains 
at  its  present  figures,  about  $450,000,000  a  year. 

§  88.  It  is  now  necessary  to  take  into  account  the  fact 
that  perhaps  two-thirds  of  the  whole  volume  of  business 
The  influence  transactions  is  dispatched  by  means  of  vari- 
thevaiuVof  ous  instruments  of  credit.  This  fact  has 
money.  jg^j  some  writers  to  the   conclusion  that   the 

growth  of  credit  has  invalidated  the  theory  that  the  pur- 
chasing power  of  money  depends  on  the  conditions  of 
supply  and  demand.  And  if  the  use  of  credit  could  be 
carried  to  any  extent  whatever,  so  that,  in  case  the  supply 
of  money  should  greatly  decrease,  all  exchanges  could 
continue  on  the  old  basis  simply  by  resorting  to  a  larger 
supply  of  credit,  the  criticism  of  the  accepted  theory  would 
be  well  founded.  Money  would  have  no  effect  on  prices 
if  it  were  not  necessary  for  the  transaction  of  the  existing 
volume  of  business  at  the  present  level  of  values. 

But  the  employment  of  credit  cannot  be  increased  at 
will  in  order  to  prevent  a  change  of  prices.  Book  credits, 
promissory  notes,  and  bills  of  exchange  are  now  used 
about  as  extensively  as  business  men  find  it  convenient  to 


THE  LAWS  OF  MONEY  1 35 

employ  them.     A  sudden  currency  famine  might  lead  to 
a  greater  use  of  these  and  other  devices  for  exchanging 
commodities  without  the  use  of  money,  but  not  The  effect  of 
to  such  an  extent  as  to  obviate  all  inconven-  promi"s^oo^^' 
ience  or  prevent  a  sharp  fall  of  prices.     It  is  ^j'ljs^of^"'^ 
not  accident,  but  the  extent  to  which  they  are  exchange, 
found  convenient,  that  hmits  the  use  of  these  instruments 
of  credit. 

Bank  notes  and  checks  are  employed  in  quantities  that 
vary  from  year  to  year;  and  it  might  seem,  at  first  thought, 
that  a  deficiency  of  metallic  money  could  be  ^  ^^  ^^ 

remedied  easily  enough  bv  an  increased  em-   tank  notes 

'  and  checks. 

ployment  of  these  forms  of  bank  credit.  Un- 
fortunately, however,  there  are  very  definite  limits  beyond 
which  bank  notes  and  checks  cannot  be  used  without  the 
most  serious  danger.  The  limits  arise  from  the  fact  that 
both  of  these  forms  of  bankers'  obligations  must  be  in- 
stantly convertible  into  cash  if  they  are  not  to  depreciate 
—  a  consideration  which  will  require  further  treatment  in 
subsequent  pages.  At  all  times  bankers  must  maintain  a 
reserve  of  ready  money,  which,  according  to  circumstances, 
should  be  from  five  to  thirty  per  cent  of  the  amount  of 
money  owed  to  depositors  and  holders  of  notes.  It  ap- 
pears, therefore,  that  the  employment  of  checks  and  bank 
notes  is  limited  by  the  necessity  of  maintaining  a  specie 
reserve,  so  that  there  are  bounds  beyond  which  the  use  of 
these  instruments  cannot  be  carried  without  an  increase 
of  the  supply  of  ready  money.  For  this  reason  it  is  safe 
to  conclude  that  there  mu.st  always  be  a  connection  be- 
tween the  amount  of  money  in  circulation  and  the  cxtenf 
to  v\ich  credit  c;ui  be  cm^jloycd. 


MONEY  AND   CREDH^ 

§  89.   Full  importance  will  be  given  to  the  part  which 

credit  plays  in  the  exchange  of  commodities  if  we  make  a 

Bumma    •  as  ^^^§^^  restatement  of  our  theory.  CBooIc  credits, 

to  the  value  bills  of  exchange,  and  promissory  notes  suffice 
of  money.  .... 

tor   many   exchanges   m   which   no   money   is 

used;  and  we  may  consider  that  their  effect  is  to  reduce, 
by  so  much,  the  demand  for  money.  Bank  notes  and 
checks,  on  the  other  hand,  call  for  the  use  of  some  money 
as  a  specie  reserve,  but  they  enable  one  dollar  thus  held  by 
a  banker  to  do  the  work  of  three  or  four  dollars  in  actual 
circulation;  thus  they  increase  the  efficiency  of  a  given 
stock  of  coin.  Bearing  these  considerations  in  mind,  we 
can  formulate  the  following  complete  theory  J  The  value 
of  money  depends  upon  the  demand,  as  decreased  by  certain 
instruments  of  credit;  and  upon  the  supply,  as  increased 
by  the  heightened  efficiency  of  those  coins  which  are  held  as 
a  reserve  for  the  circulation  of  checks  and  bank  notes. 
Ultimately,  as  we  have  seen,  the  cost  of  producing  gold 
affects  its  value ;  but  this  fact  needs  no  further  attention. 
§  90.  We  now  pass  to  a  second  principle  relating  to 
money,  which  is  known  as  Gresham's  law.  As  far  back  as 
The  second  the  record  extends,  governments  have  continu- 
Gresham's  ^.lly  tried  experiments  with  debased  money.  By 
law.  ^]^g  gjfjg  q£  specie  they  have  forced  paper  into 

circulation ;  they  have  gathered  up  coins  of  full  weight  and 
recoined  them  into  lighter  pieces ;  or,  when  one  metal  had 
become  the  established  medium  of  exchange  and  standard 
of  value,  they  have  issued  money  made  of  the  other  metal. 
In  the  last  case  the  new  coins  have  been  given  a  certain 
nominal  value  in  terms  of  the  old,  but  changes  in  the 
market  ratio  of  gold  and  silver  have  sooner  or  later  made 


THE  LAWS  OF  MONEY  1 37 

the  metallic  contents  of  the  one  kind  of  money  less  \  alu- 
able  than  the  contents  of  an  equal  nominal  amount  of  the 
other.  From  centuries  of  such  experience  economists 
have  derived  a  law  governing  the  operation  of  debased 
money,  which  has  been  named  after  Sir  Thomas  Gresham, 
in  his  day  "the  greatest  merchant  of  London,"  who  in 
the  sixteenth  century  called  to  the  attention  of  Queen 
Elizabeth  the  fact  that  "bad  money  drives  out  good." 

With  other  things  the  worse  may  be  displaced  by  the 
better,  since  it  is  for  the  interest  of  consumers  to  buy  the 

best   that   the   market  affords.     Monev,   how- 

lUustrations. 
ever,  is  in  demand,  not  as  an  object  of  per- 
sonal consumption,  but  as  a  medium  for  paying  debts; 
and  it  is  obviously  for  the  interest  of  the  debtor  to  employ 
the  cheapest  sort  of  coins  that  the  law  will  permit  him  to 
offer  his  creditor.  In  the  seventeenth  century,  when 
Massachusetts  made  public  taxes  payable  in  cattle,  the 
taxpayers  naturally  turned  over  to  the  provincial  treasury 
the  poorest  cattle  in  their  pastures,  until,  in  1658,  tt)<? 
Great  and  General  Court  was  obliged  to  enact  that  no 
man  should  discharge  the  rates  "with  leane  cattle."  In 
the  eighteenth  century  when  North  Carolina  made  seven- 
teen different  commodities  legal  tender  for  debts,  public 
and  private,  the  governor  of  the  province  observed  that  it 
was  "a  stated  rule  that,  of  so  many  commodities,  the 
worst  sort  only  were  paid."  Illustrations  of  the  truth  of 
Gresham's  {)rincii)lc  might  l)e  multiplied,  i)ul  the  testi- 
mony of  reason  and  experience  is  so  uniform  that  it  is 
unnecessary  to  dwell  longer  upon  the  subject. 

The  operation  of  Gresham's  law  does  not  depend,  under 
modern  conditions,  upon  the  action  of  the  mass  of  the 


138  MONEY  AND   CREDIT 

people  in  picking  over  the  various  coins  in  order  to  elect 

the  cheapest   medium  for  the  payment   of  debts.     The 

work  is  done  far  more  promptly  and  quietly 

Method  in  i.  r    j  ~y.  j 

which  the       by  bankers,   money  dealers,   and    goldsmiths, 

law  operates.        ^  ^        •  i         i  , 

whose  busmess  compels  them  to  note  the 
smallest  differences  in  the  bullion  value  of  coins.  A  gold- 
smith will  select  only  new  gold  eagles  that  have  lost  none 
of  their  weight  through  abrasion,  when  he  places  money 
in  the  melting  pot;  and  a  banker  will  select  the  same  sort 
of  pieces  when  he  exports  gold  to  England,  where  it  must 
pass  as  so  much  bullion.  Thus  lighter  coins  remain  in 
domestic  channels  of  circulation,  and  heavier  money  dis- 
appears. So,  too,  if  an  unhmited  quantity  of  inferior 
silver  coins  or  paper  money  should  be  forced  upon  the 
country,  it  would  be  chiefly  the  bankers,  money  changers, 
and  goldsmiths  into  whose  coffers  our  gold  would  dis- 
appear. 

§  91.  But  there  are  certain  limits  to  the  power  of  in^ 
ferior  money  to  drive  out  superior.  At  the  present  mo- 
,.   .    .         ment  something  more  than  $s, 000, 000, 000  of 

Limitations  .  "  ,  ot  ^        •>         ■> 

on  the  action  gold  is  supposed  to  circulate  in  the  United 

of  the  law. 

States,  or  to  be  held  in  bank  reserves  and  the 
federal  treasury.  Yet  by  the  side  of  this  standard  money 
circulate  $314,893,000  of  paper  issued  by  the  govern- 
ment, and  silver  to  the  nominal  amount  of  $731,300,000 
which,  if  put  into  the  melting  pot,  would  be  worth 
considerably  less  than  a  dollar.  How,  indeed,  are  these 
facts  to  be  reconciled  with  our  law  that  cheap  money 
drives  out  dearer? 

The  difficulty  is  cleared  up  when  the  law  is  modified  so 
as  to  read  :  Cheaper  money  drives  out  oj  circulation  a  sub- 


THE  LAWS  OF  MOiVEY  1 39 

stantially  equivalent  amount  oj  dearer  money.  The  reason 
for  such  a  hmitation  of  the  principle  is  not  hard  to 
explain.  The  present  volume  of  business  in  the  The  law 
Cnited  States  could  not  be  transacted  at  the  "stated. 
present  level  oj  prices  without  about  as  many  dollars  of  all 
kinds  as  are  now  in  circulation.  If  a  large  part  of  our 
present  supply  of  gold  should  leave  the  country,  prices 
would  fall  to  a  marked  degree  unless  an  equivalent  amount 
of  paper  and  silver  were  added  to  the  currency.  Such  a 
fall  in  prices  would  cheapen  commodities  so  greatly  that 
gold  would  flow  back  into  the  country  in  order  to  purchase 
various  products  on  the  favorable  terms  that  would  be 
offered.  Our  present  supply  of  gold,  therefore,  is  in  no 
danger  of  leaving  the  country  if  we  see  to  it  that  no  addi- 
tion is  made  to  the  stock  of  paper  and  debased  silver  now 
in  circulation.  The  debased  money  already  issued  has, 
undoubtedly,  driven  out  an  equivalent  quantity  of  gold, 
or,  what  is  the  same  thing,  has  prevented  it  from  coming 
to  us.  But  it  cannot  drive  out  all  of  the  gold  because  its 
supply  is  limited  to  a  quantity  that  is  not  sufficient  to 
carr\^  on  the  business  of  the  country  except  at  abnormally 
low  prices  that  would  attract  the  yellow  metal  back  to  our 
markets.  Bad  money,  then,  displaces  an  approximately 
similar  amount  of  good  money,  but  no  more. 

Indeed,  if  a  country  which  originally  had  no  money  but 
gold  should  issue  paper  or  debased  silver  up  to  80  or  90  per 
cent  of  its  total  circulation,  10  or  20  per  cent  of 

/  Additional 

its  former  gold  supply  wouUl  remain  in  its  accus-   considera- 
tomed  place  if  all  the  other  factors  in  the  situa- 
tion were  unchanged.     In  strict  theory  it  might  be  possible 
to  issue  debased  money  to  the  extent  of  99  per  cent  of  the 


140  MONEY  AND   CREDIT 

gold  supply  without  driving  the  remaining  fraction  of  the 
yellow  metal  out  of  circulation  or  raising  prices.  Gener- 
ally, however,  the  threat  of  a  large  issue  of  debased  cur- 
rency has  the  effect  of  checking  business  activity  and  so 
of  reducing  the  demand  for  money.  If  the  demand  de- 
clines by  20  per  cent,  then  all  gold  would  be  driven  out  of 
circulation  after  silver  or  paper  had  been  issued  to  the 
extent  of  80  per  cent  of  the  former  money  supply.  This 
fact,  moreover,  is  usually  overlooked  whenever  a  country 
begins  to  revel  in  the  delights  of  a  plentiful  supply  of  cheap 
money ;  it  is,  indeed,  one  of  the  chief  things  to  be  appre- 
hended whe.i  the  process  of  tinkering  with  a  sound 
currency  begins. 

§  92.  Our  third  principle  is  the  law  governing  the  ter- 
ritorial distribution  of  the  precious  metals.  Gold  and 
The  third        silver  are  not  produced  in  material  quantities 

territo*rfal  ^^    ^^^    COUntricS ;     in    fact,    production    is    local- 

distribution  j2ed  in  a  few  regions  that  are  noted  for  their 
of  precious  ° 

metals.  large  output.     And  yet,  in  proportion  to  their 

needs,  all  countries  seem  to  be  supplied  tolerably  well 
with  gold,  or  silver,  as  they  prefer.  Evidently  there  must 
be  some  process  by  which  this  uniform  distribution  of  the 
annual  output  is  carried  on. 

The  process  is  nothing  else  than  international  exchange. 

If  it  ever  happens  that  the  purcliasing  power  of  the  metal 

in  any   country  is   materially  higher  than  in 

governing  the  others,  gold  inevitably  flaws  to  that  place  where 

distribution.       .  .  .      ,  ,  - 

tts  value  IS  greatest.  1  his  is  another  way  01 
saying  that  low  prices  attract  gold  away  from  regions 
where  prices  are  higher.  In  countries  where  there  is  a 
large  output  of  the  precious  metals,  the  purchasing  power 


TtiE  LAWS  OP  Md^kY  t41 

of  gold  would  be  greatly  reduced  if  none  of  the  annual 
product  was  exported  to  lands  that  are  without  importani 
mines.  Differences  in  general  levels  of  prices,  therefore, 
are  the  motive  power  that  forces  the  constant  outflow  of 
gold  from  the  regions  where  the  principal  mines  are  found. 
§  93.  The  position  of  a  gold-producing  country  is  well 
illustrated  by  the  experience  of  the  United  States.  Prior 
to   the    Californian   discoveries    in    1848,    this  „   .^. 

_  Position  of 

country  produced  an  insignificant  quantity  of  gowproduc- 

11  1      M  1  11-1  1  1  ing  countries. 

gold  and  silver,  and  was  obhged  to  depend  on 
its  foreign  trade  to  bring  in  an  adequate  supply  of  the 
precious  metals.  From  182 1,  when  the  reported  statistics 
begin,  down  to  1850,  when  the  gold  production  suddenly 
rose  to  enormous  proportions,  imports  of  gold  and  silver 
into  the  United  States  exceeded  exports  by  $70,000,000.  In 
1 85 1,  however,  the  pendulum  swung  in  the  other  direc- 
tion, and  the  net  exports  were  not  less  than  $24,000,000. 
During  the  decade  from  1851  to  i860  the  exports  of 
specie  exceeded  imports  by  the  enormous  sum  of 
$417,608,000,  which  was  nearly  three  quarters  of  the 
total  output  of  the  mines;  and  since  that  time  the  United 
States  has  been  normally  a  specie-exporting  country.^  No 
other  result  could  have  been  expected. 

§  94.  Other  causes  sometimes  influence  the  movements 
of  specie,  as  we  shall  learn  in  a  later  chapter;  but  the 
principal  factor  is  the  tendency  of  gold  to  seek  the  market 

'  From  1878  to  1883,  from  1897  to  iqo8,  and  from  191 5  to  191 8  Rold 
imports  largely  exceeded  exports.  Each  of  these  cases  was  due  to  unusual 
developments  in  our  foreign  trade.  As  long  as  the  United  States  con- 
tinues to  produce  $8o,ooo,ocxd  to  890,000,000  of  gold,  it  is  likely  to  remain, 
normally,  a  gold-exporting  country  unless  the  growth  of  foreign  invest- 
ments makes  it  a  creditor  nation. 


142  MOJVEV  AND  CREDIT 

where  prices  are  lowest.     The  gold   movement  is  auto* 

raatic,  regulating  itself  according  to  the  needs  of  business, 

unless  cheaper  money  is  issued  to  cause  a  seri- 

Conclusion. 

ous  displacement.  If  gold  exports  are  not  due 
to  the  action  of  Gresham's  law,  they  will  cease  automat- 
ically as  soon  as  the  flow  of  money  from  the  country 
lowers  prices  to  about  the  level  that  prevails  elsewhere; 
while  an  inflow  will  not  continue  after  it  has  raised  prices 
enough  to  make  the  purchasing  power  of  gold  no  higher 
than  it  is  in  other  places.  Every  nation  that  does  not 
meddle  with  inferior  substitutes  must  receive  from  its 
mines  or  its  trade  enough  gold  to  enable  it  to  transact  its 
business  at  a  general  level  of  prices  substantially  similar 
to  that  which  rules  in  the  rest  of  the  world;  while  more 
than  this  amount  it  cannot  permanently  retain. 

FOR   SUPPLEMENTARY   STUDY 

General :  Bullock,  Selected  Readings  in  Economics,  387-405 ; 
Hadley,  Economics,  180-207,  232-241 ;  Nicholson,  Polit- 
ical Economy,  II,  88-124,  131-139;  Seager,  Introduction 
to  Economics,  302-310;  Taussig,  Principles  of  Economics,  Bk. 
III. 
Special :  Jevons,  Money  and  the  Mechanism  of  Exchange,  3-85, 
187-191  ;  White,  Money  and  Banking,  41-59,  217-255; 
ESCHER,  Elements  of  Foreign  Exchange;  Kinley,  Money, 
chs.  I-V,  IX-XI ;  Phillips.  Readings  in  Money  and  Banking, 
chs.  I,  II,  III,  XVIII,  XIX;  White,  Money  and  Banking, 
16-59. 


CHAPTER  VIII 

PROBLEMS   OF  MONEY  AND   BANKING 
I.    Government  Paper  Mon  jy 

§  95.  Many  countries  have  tried  disastrous  experi- 
ments with  government  paper  money,  which  consists  of 
circulating  notes  issued  by  governmental  au-  Government 
thority.  These  notes  usually  bear  on  their  p^^'*^- 
face  the  promise  of  the  government  to  redeem  them,  gen- 
erally at  no  specified  time;  they  are  receivable  for  taxes 
and  other  dues  at  the  public  treasury;  and  commonly 
are  declared  a  legal  tender  for  all  private  debts.  While 
frequently  a  paper  currency  has  been  received  willingly 
enough  when  first  issued,  the  coercion  of  a  legal  tender 
law  has  usually  been  employed  to  maintain  the  credit  of 
such  currency;  and  the  longer  the  issues  continue,  the 
more  the  element  of  forced  circulation  comes  to  the  front. 

§  96.  The  advocates  of  government  paper  have  usually 
argued  that  paper  money  is  cheaper  than  specie  since,  by 
its  use,  a  country  saves  the  expense  of  procur-  Arguments  in 
ing  and  maintaining  a  large  stock  of  the  pre-  J*Vcheap- 
cious  metals.  This  is  undoubtedly  true,  but  it  °"^- 
is  a  matter  of  no  consequence  if  experience  has  shown  that 
paper  currency  is  an  unsafe  medium  of  exchange.  Then, 
too,  in  any  case,  specie  must  be  employed  in  foreign  ex- 
changes since  one  nation  will  not  accept  paper  issued  ia 
another. 

M3 


144        PROBLEMS  OF  MONEY  AND  BANKING 

But  it  is  claimed  that  a  paper  currency  can  be  employed 
with  perfect  safety  and  convenience,  provided  that  meas- 
ures are  adopted  to  prevent  its  being  issued  in 
excess  of  the  needs  of  trade.  This,  again,  is 
entirely  true;  and  it  would  be  a  highly  important  consid- 
eration if  it  were  possible  to  devise  some  perfectly  safe 
method  of  restricting  the  issue  of  paper.  If  a  community 
is  using  $1,000,000  of  specie  in  transacting  its  exchanges, 
the  government  might  issue  about  $1,000,000  of  paper 
without  inflating  prices  and  causing  depreciation,  provided 
that  this  was  done  in  such  a  way  as  to  assure  business 
men  that  the  new  currency  would  not  be  increased  beyond 
that  limit.  But  such  assurance  it  is  impossible  to  give. 
Advocates  of  paper  money  have  exhausted  their  ingenuity 
in  devising  automatic  methods  of  hmiting  the  issue;  but 
most  of  these  have  been  tried  at  some  time  or  other,  and 
found  wanting.  Even  if  a  satisfactory  restriction  could 
be  invented,  there  would  be  no  guarantee  that  the  legis- 
lature would  not  repeal  or  amend  the  law  if  it  ever  desired 
to  increase  the  volume  »f  the  currency. 

The   least   intelligent   argument   in   favor  of  a  paper 
medium  is  that  any  kind  of  money  depends  for  its  exist- 
ence solely  on  the  action  of  government  in 

(<:)  Fiatism.       ...  .  i  •        •         i         ,  i  rr^i 

issumg  it  and  makmg  it  a  legal  tender.  1  here- 
fore,  it  is  said,  the  government  can  make  one  thing  a 
dollar  as  well  as  another,  and  should  select  that  medium 
which  is  cheapest.  Our  study  of  the  development  of 
metallic  money  has  already  demonstrated  the  falsity  of 
the  behef  that  it  depends  for  its  value  solely  upon  the  fiat 
of  any  government.  Undoubtedly  the  fact  that  gold  is 
employed  as  money  increases  its  value  by  opening  a  new 


GOVERN'MEN'T  PAPER  MONEY  I45 

use  for  that  metal,  but  it  was  a  useful  commodity  before 
it  ever  became  a  medium  of  exchange;  moreover,  it  was 
by  the  action  of  individuals,  not  that  of  governments, 
that  gold  was  gradually  preferred  to  other  commodities 
for  monetary  purposes.  Governments  may  declare  that 
a  piece  of  paper  shall  circulate  as  a  dollar,  and  may  force 
such  money  upon  creditors  who  are  bound  by  past  con- 
tracts; but  the  new  unit  of  value  will  be  a  paper  dollar 
after  all,  not  a  gold  dollar.  Whether  the  paper  currency 
will  be  as  good  as  the  gold  depends  on  the  amount  of  it 
which  the  government  tries  to  place  in  circulation. 

§  97.   Although   w^e   have   admitted   that   paper  might 
answer  the  purposes  of  money  in  domestic  exchange,  pro' 
vided   that   its  supply   is   held   within   proper 
bounds,  the  concession  weakens  in  no  way  the  against  gov- 
case  against  government  issues ;  for  the  chances  pap™^"*^ 
are  that  a  limitation  cannot    be    maintained.  (-^  Danger  of 

overissue. 

In  the  first  place,  if  the  currency  is  emitted  in 
order  to  defray  public  expenses,  —  and  this  is  the  way 
in  which  issues  generally  begin,  —  the  real  or  supposed 
needs  of  the  treasury  are  likely  to  lead  to  repeated  emis- 
sions. It  is  far  easier  to  set  a  printing  press  at  work  than 
to  levy  taxes  for  the  support  of  a  government,  and  this 
consideration  will  weigh  heavily  with  a  legislature  anxious 
to  please  its  constituents.  Then,  too,  in  time  of  war 
public  expenditures  are  almost  certain  to  exceed  estimates 
and  to  furnish  plausible  excuses  for  additional  issues  of 
pa[)cr.  Our  Continental  Congress  began  by  emitting 
$3,000,000  of  bills  of  credit,  and  finally  placed  $241,000,000 
in  circulation.  In  time  of  peace  it  may  be  proi)osed  to 
issue  paper  in  order  to  construct  useful  public  works,  as 


146      probjlems  of  money  and  banking 

roads;  in  fact  the  advocates  of  such  money  never  lack 
reasons  for  setting  the  printing  presses  at  work. 

In  a  popular  government  a  second  factor  operates  with 
unpleasant  force  and  frequency  in  favor  of  enlarging  a 

Demand  P^P^^  Currency.  In  all  countries  there  are 
of  debtor         large   numbers   of   men   who   have    borrowed 

classes. 

money,  and  will  be  materially  benefited  by 
any  measure  that  lowers  the  value  of  the  medium  in  which 
repayment  must  be  made.  This  is  particularly  true  of  the 
United  States,  since  in  all  the  newly  settled  districts  land 
is  purchased,  buildings  are  erected,  and  extensive  improve- 
ments undertaken  by  means  of  money  borrowed  in  the 
older  and  wealthier  states.  It  has  happened  repeatedly 
that  legislative  bodies  have  been  controlled  by  the  debtor 
classes  who  have  clamored  for  relief  from  the  pressure  of 
their  debts.  In  national  politics  the  same  influences  have 
given  rise  to  demands  for  "more  money"  with  which  to 
pay  debts,  and  in  this  way  the  national  credit  has  been 
impaired  and  the  stability  of  our  monetary  system  threat- 
ened. From  1690  down  to  recent  times,  our  country  has 
been  trying  repeated  experiments  with  cheap  money,  which, 
in  almost  every  generation,  have  caused  as  much  financial 
loss  as  a  destructive  war.  Experience  should  incline  us 
to  extreme  skepticism  concerning  the  efficacy  of  any  plan 
for  limiting  the  issue  of  cheap  paper. 

§  98.  Whenever  government  issues  are  employed,  the 
paper  begins  to  displace  specie,  although  gold  will  not 
,  „  ,.     .        whollv  disappear  until  there  is  enough  of  the 

Inflation  m  ^  ^  "^  f 

the  United  cheaper  medium  to  take  its  place.  When  this 
SUtes.  .  ^ 

pomt   has    been    reached,    further   issues   will 

cause  a  rise  of  prices,  i.e.,  a  paper  dollar  will  begin  to  com- 


GOVERNMEl^T  PAPER  MONEV  I47 

mand  fewer  commodities;  while,  the  purchasing  power 
of  specie  remaining  unchanged,  a  difference  will  appeal 
between  the  value  of  paper  and  that  of  gold.^  The 
premium  on  gold  will  increase  so  long  as  the  inflation 
continues;  and  prices  will  continue  to  rise  until  they 
finally  reach  enormous  figures.  Since  the  paper  currency 
costs  practically  nothing,  it  may  be  issued,  despite  the  de- 
preciation, until,  as  in  our  War  for  Independence,  a 
bushel  of  money  will  hardly  purchase  a  suit  of  clothes. 
When  this  point  is  reached,  the  currency  becomes  practi- 
cally worthless  and  inflation  will  stop ;  but  this  is  the  only 
limit  to  the  depreciation.  Obviously,  debtors  can  ex- 
tinguish a  large  number  of  debts  with  very  httle  trouble 
under  such  conditions  as  have  been  described.  By  1779 
and  1780  our  Continental  issues  had  rendered  thousands 
of  people  penniless,  and  had  almost  destroyed  the  last 
vestige  of  faith  between  man  and  man.  "Old  debts  were 
paid  when  the  paper  money  was  more  than  seventy  for 
one.  Brothers  defrauded  brothers,  children  parents,  and 
parents  children.  Widows,  orphans,  and  others  were 
paid,  for  money  lent  in  specie,  with  depreciated  paper, 
which  they  were  compelled  to  receive." 

And  yet  this  carnival  of  fraud  took  place  in  spite  of  the 
fact  that  the  various  colonies  had,  between  1690  and  1764, 
tried  many  disastrous  experiments  with  paper  The  green- 
money.     The    bitter    lessons    taught    by    the  ''^'^^^ 
Continental  currency  were  sufficient  to  make  all  honest 
men  abhor  the  very  name  of  bills  of  credit;    but  such 

1  This  is  callerl  a  premium  on  goUl.  During  our  Civil  War  the  pre- 
mium on  jjmM  r(;se  at  one  time  to  185.  This  meant  that  ^285  in  pajjci 
was  needed  to  purchase  Sioo  in  gold. 


148       PROBLEMS  OF  MONEY  AMD  BANKING 

memories  had  died  out  when,  in  1862,  our  national 
government  issued  $150,000,000  of  greenbacks,  which  were 
soon  increased  to  $450,000,000,  This  time  the  fortunate 
turn  of  miHtary  operations,  rather  than  any  wisdom  on  the 
part  of  Congress,  confined  the  issues  to  a  volume  that  was 
not  large  enough  to  cause  such  enormous  depreciation  as 
occurred  during  the  Revolution.  Yet  in  1864  the  green- 
backs were  worth,  on  the  average,  less  than  50  per  cent  of 
their  nominal  value,  so  that  the  country  suffered  from  the 
evils  of  a  depreciated  currency.  In  1879  the  government 
began  to  redeem  the  notes  in  coin,  having  accumulated  a 
reserve  of  $133,000,000  of  specie;  and  since  then  green- 
backs have  been  instantly  convertible  into  gold  at  the 
demand  of  the  holder.  Unfortunately,  however,  an  un- 
wise law  passed  in  1878  prevents  the  treasury  from 
destroying  a  note  after  it  has  been  redeemed,  so  that,  by 
being  reissued  in  any  payments  that  the  government 
makes,  the  greenbacks  continue  to  circulate.^ 

§  99.  The  present  law,  enacted  in  1900,  provides  that 
a  gold  reserve  of  $150,000,000  shall  be  maintained  in 
Our  present  Order  to  insure  prompt  redemption  of  the 
position.  greenbacks;  but  it  does  not  require  them  to 
be  destroyed  when  drawn  into  the  treasury  in  this  man- 
ner. On  the  contrary,  it  prescribes  a  method  by  which 
they  may  be  reissued,  with  the  result  that  the  greenbacks 
are  still  looked  upon  as  a  part  of  our  currency  system. 
From  1890  to  1894  demands  for  the  redemption  of  enor- 

*  As  a  result  of  the  law  of  1878,  the  greenbacks  left  in  circulation 
amount  to  $346,681,000.  Since  1879  the  government  has  redeemed  in 
gold  over  fifteen  times  this  amount  of  the  notes  without  reducing  the 
quantity  outstanding. 


BANKS  AS  INSTITUTIONS  OF   CREDIT        149 

mous  quantities  of  the  greenbacks  forced  the  government 
into  dire  straits;  but  various  events  have  improved  the 
situation  so  that  there  is  Httle  reason  to  apprehend  serious 
danger  in  times  of  peace.  The  objection  to  them  now  is 
chiefly  that  they  would  serve  as  a  precedent  for  new  issues 
in  case  the  United  States  should  ever  be  involved  in  a 
serious  war.  It  would  be  far  better  to  have  the  greenbacks 
retired  by  some  gradual  method,  in  order  that  we  may  not 
countenance  even  the  limited  employment  of  such  a  dan- 
gerous agency  as  government  paper  money. 

II.    Banks  as  Institutions  of  Credit 

§  100.  It  is  now  in  order  to  study  with  some  care  the 
part  played  by  banks  in  facilitating  the  commerce  of  the 
world.  After  considering  the  various  func-  The  deposit 
tions  exercised  by  the  banker,  we  shall  exam-  ^i^nction. 
ine  briefly  the  manner  in  which  this  important  business  is 
Ci-ganized  in  the  United  States.  A  bank  has  been  defined 
tersely  as  "a  manufactory  of  credit  and  a  machine  of 
exchange."  In  fulfilHng  its  functions  it  endeavors,  first 
of  all,  to  establish  its  credit  upon  such  a  sound  basis  as  to 
attract  deposits  of  the  surplus  cash  of  the  community 
which  individuals  do  not  care  to  carry  in  their  pockets 
and  business  concerns  wish  to  place  elsewhere  than  in  the 
money  drawer.  The  large  corporations  of  modern  times 
have  to  keep  millions  of  dollars  in  bank  in  order  to  insure 
prompt  payment  of  running  expenses,  while  even  the  pro- 
prietor of  a  small  store  prefers  to  deposit  in  a  bank  all  of 
each  day's  receipts  that  are  not  needed  in"  making  change." 
Competition  Ijctween  banks  fre(juently  leads  to  the  ofTcr 
of  interest,  generally  at  the  rate  of  two  per  cent,  upon  de- 


(50       PROBLEMS  OF  MONEY  AND  BANKING 

posits  of  considerable  size;  but  even  when  interest  is  not 
paid,  the  convenience  of  the  check  system  is  sufficient  to 
attract  a  large  b'ody  of  depositors. 

§  loi.  Over  three  hundred  years  ago,  bankers  found  that 
not  more  than  a  certain  proportion  of  their  deposits  was  ever 
The  function  called  for  at  any  one  time ;  and  they  perceived 
of  discount.  |.j-jg^|-  j|.  ^vould  be  perfectly  safe  to  lend  at  interest 
a  considerable  part  of  the  money  intrusted  to  their  keeping, 
To  this  depositors  would  not  object,  provided  that  a  suffi- 
cient reserve  of  cash  was  kept  on  hand  to  meet  all  their 
demands  from  day  to  day;  because,  by  investing  the 
funds,  bankers  could  afford  to  receive  deposits  without 
making  any -charge  for  keeping  them  in  a  place  of  safety. 
In  this  manner  banks  now  gather  up  the  surplus  cash  of 
a  community,  and  lend  it  out  to  persons  who  desire  to 
borrow.  Usually  the  borrowers  are  men  who  are  en- 
gaged in  successful  business  enterprises,  and  who  desire  to 
obtain  capital  with  which  to  extend  them.  They  offer  to 
the  banker  their  notes  of  hand,  secured  by  responsible 
indorsers  or  by  the  deposit  of  collateral ;  ^  or  else  they 
present  bills  of  exchange  representing  commercial  trans- 
actions from  which  the  returns  are  not  yet  available.^ 
Such  notes  and  bills  are  bought  by  the  banker  at  a  stipu- 
lated rate  of  discount,  and  thus  become  his  property.  By 
studying  their  customers  carefully  and  watching  the  course 
of  business,  banks  can  make  commercial  paper  an  ex- 
tremely safe  sort  of  investment. 

^  Stocks  and  bonds  of  corporations  are  the  usual  collateral,  the  banket 
accepting  them  as  security  for  a  loan  to  the  amount  cf  from  60  to  90  per 
c-ent  of  their  market  quotations,  according  to  the  stability  of  their  value. 

2  Thus  a  merchant  who  sells  goods  upon  thirty  days'  credit  can  draw 
upon  his  customer  and  discount  the  bill  at  his  bank. 


BAJVKS  AS  INSTITUTIONS   OF  CREDIT         \%\ 

§  I02.  Deposit  and  discount  are  the  essential  functions 
that  an  institution  must  exercise  in  order  to  be  a  bank,  but 
other  functions  may  be  added.  Of  these,  the  The  issue 
one  that  has  received  the  most  attention  is  that  °*  °°^®®- 
of  issuing  circulating  notes  payable  on  demand.  Since 
bank  notes  circulate  readily  from  hand  to  hand,  they  are 
of  considerable  use  to  the  business  of  a  community  in 
which  few  persons  keep  deposits  at  a  bank  and  use  checks 
in  making  payments;  in  large  cities,  however,  the  check 
is  the  more  convenient  medium  of  exchange.  In  all 
countries  it  has  been  found  necessary  to  regulate  by  law 
the  issue  of  circulating  notes  by  banking  institutions. 

§  103.   The  operations  of  a  bank  will  be  most  easily 
described   by   means   of  a   simple   illustration.     Suppose 
that  a  banking  corporation  begins  business  with 
a  capital  of  $50,000,  and  that  it  immediatelv  re-  operations 

...  ^  ^  '     ,        illustrated. 

ceives  deposits  to  the  amount  01  ^5100,000.  Ihe 
capital,  it  should  be  observed,  serves  as  a  guarantee  for 
the  safety  of  the  depositors'  money ;  for  if  bad  investments 
are  made,  resulting  in  a  loss,  the  creditors  of  a  company 
can  lose  nothing  until  the  entire  capital  is  wiped  out.  At 
this  stage  of  its  operations,  the  balance  sheet  of  the  bank 
would  stand  as  follows ;  — 

Liabilities  I  Resources 

Capital  stock      ...     $  50,000  j  Office  fixtures  .     .     .     $     5,000' 

Deposits 100,000    Cash 145,000 

$150,000,  $150,000 

We  will  now  suppose  that  the  company  lends  to  various 
persons  $roo,ooo  for  ninety  days  at  six  per  cent  interest. 

1  We  will  assume  that  the  C(jmpany  rents  its  offices,  and  invests  ;?500C 
in  furniture,  tixturM,  and  supplies. 


C52        PROBLEMS  OF  MONEY  AND  BANKING 


These  borrowers  have  accounts  at  the  bank,  and  wish 
to  have  the  funds  which  they  borrow  available  for  with- 
drawal by  the  usual  method  —  by  check.  Accordingly 
the  company  will  deduct  $1500  for  interest/  and  credit 
the  borrowers  with  deposits  to  the  amount  of  $98,500. 
When  this  is  done,  the  balance  sheet  of  the  bank  will 
stand  as  follows:  — 


Liabilities 

Capital %  50,000 

Depositors    ....  198,500 

Profits  2         ....  1,500 


$250,000 


Resources 

Fixtures  

Cash    .  .... 

Loans  and  discounts  . 


$  5,000 
145,000 
1 00,000 

$250,000 


By  this  transaction,  it  will  be  observed,  the  bank  has 
increased  its  liabilities  to  depositors  by  $98,500;  as  an 
offset,  it  now  owns  $100,000  of  promissory  notes  or  bills  of 
exchange,  classed  as  loans  and  discounts,  which  at  the  end 
of  three  months  will  not  only  cancel  such  obligations,  but 
also  leave  a  profit  of  $1500.  Whenever  loans  are  made, 
the  effect  is  to  increase  a  bank's  deposits,  since  most  of 
the  borrowers  will  be  depositors  and  will  desire  to  draw 
out  their  money  more  or  less  gradually  by  check.  De- 
posits originating  in  this  way  are  precisely  like  the  $ioo,ooc 
of  liabihties  due  to  persons  who  deposited  cash  in  the  bank. 
except  for  the  fact  that  they  are  obtained  by  giving  promis- 
sory notes  instead  of  turning  over  cash.  Let  us  now 
suppose  that  depositors  draw  checks  to  the  amount  of 
$50,000  in  order  to  effect  various  payments.     After  the 

1  Except  with  call  loans,  which  are  payable  on  demand,  or  call,  banks 
regularly  deduct  interest  in  advance. 

'  The  profiU  must  be  accounted  for  until  they  are  distributed  to  stock- 
bold«rs. 


BANKS  AS  INSTITUTIONS  OF  CREDIT         153 

checks  have  been  paid,  the  accounts  of  the  bank  will  show 
the  following  changes :  — 

Liabilities  I  Resources 

Capital $  50,000    Fixtures $     5,000 

Deposits 148,500   Cash 95,000 

Profits 1.500    Loans  and  discounts  .  100,000 

$200,000 .  $200,000 

The  bank  now  holds  $95,cxx)  of  cash  against  $148,500 
of  deposits^  a  reserve  equal  to  nearly  sixty-four  per  cent  of 
these  demand  liabilities.    Experience  has  shown  „    , . 

_  ^  Banking 

that,  under  ordinary  conditions,  a  reserve   of  operations 

.  ,  {continued). 

from  fifteen  to  twenty-five  per  cent  is  ample  to 
provide  for  all  demands  that  depositors  will  make  at  any 
one  time.  Accordingly  the  bank  will  endeavor  to^'enlarge 
its  loans,  since  the  liabilities  can  be  safely  increased ;  while 
the  profits,  of  course,  depend  upon  the  amount  of  such 
business  that  can  be  done.  It  therefore  lends  $100,000 
upon  the  same  terms  as  before,  its  balance  sheet  then 
standing  as  follows :  — 

Liabilities  .  Resources 

Capital      ...  .     $  50,000    Fixtures $     5,000 

Deposits        .  .     .       247,000 1  Cash 95,000 

Profits -^.ooo   Loans  and  discounts     .     200,000 

-'         1  . 

$300,000 1  $300,000 

The  cash  reserve  being  still  nearly  forty  per  cent  of  its 
liabilities,  the  bank  invests  $10,000  in  the  purchase  of 
various  securities,  the  stocks  or  bonds  of  some  prosperous 
corporation.  If,  now,  shortly  after  this,  depositors  with- 
draw $40,000,  the  condition  of  the  institution  will  be  as 
follows :  — 


154        PROBLEMS  OF  MONEY  AND  BANKING 


LIABILITIES 

Capital $  50,000 

Deposits 207,000 

Profits 3,000 


$260,000 


Resources 

Fixtures $     5,000 

Cash 45,000 

Securities 10,000 

Loans  and  discounts     .     200,000 


$260,000 


The  cash  reserve  is  now  less  than  twenty-five  per  cent  of 
the  deposits;  but  $10,000  can  be  added  to  it  upon  short 
notice  by  merely  selling  the  securities  which  the  bank 
holds. 

It  now  remains  to  study  one  other  operation,  the  issue 
of  notes.  Let  us  assume  that  the  bank  is  allowed  to  issue 
circulating  notes  with  perfect  freedom,  as  no 
bank  in  the  United  States  has  been  permitted 
to  do  for  more  than  fifty  years ;  and  assume, 
also,  that  the  occasion  for  the  issue  is  the  demand  of  the 
depositors  for  $40,000  of  ready  money.  If  the  persons  who 
present  the  checks  drawn  by  the  depositors  are  willing  to 
accept  $40,000  of  bank  notes  in  payment  of  their  claims 
against  the  bank,  then  the  balance  sheet  will  stand :  — 

Resources 


Banking 
operations 
{continued) . 


Liabilities 

Capital $  50,000 

Deposits 167,000 

Notes 40,000 

Profits 3,000 

$260,000 


Fixtures     .... 
Cash 

Securities  .... 
Loans  and  discounts 


$     5,000 

45,000 

10,000 

200,000 

$260,000 


Obviously  this  transaction  has  not  increased  the  aggre- 
gate demand  liabilities  of  the  bank,  but  has  merely  sub- 
stituted a  liability  of  $40,000  to  noteholders  for  one  of 
$40,000  to  depositors.  It  has,  however,  had  one  very 
important  result.     If  the  checks  drawn  by  depositors  had 


BANKS  AS  INSTITUTIONS  OF  CREDIT        155 

been  paid  in  cash,  the  specie  held  by  the  bank  would  have 
been  dravvn  down  to  $5000,  a  dangerousl)'  low  point. 
The  bank  could  have  increased  its  cash  by  selHng  its 
$10,000  of  securities,  but  even  this  would  have  given  a 
reserve  of  less  than  ten  per  cent  of  the  $167,000  due  to 
depositors.  Under  such  conditions  the  institution  could 
not  have  loaned  any  more  money  to  its  customary  borrow- 
ers and  would  have  had  to  curtail  its  operations  until  the 
gradual  maturing  of  some  of  the  $200,000  of  discounted 
paper  had  increased  its  cash  to  safe  proportions.  As  it 
is,  however,  by  issuing  notes  the  cash  reserve  is  kept 
unchanged ;  and  the  bank  will  not  need  to  curtail  its  loans. 

§  104.   In  the  United  States  only  three  banks  were  in  ex- 
istence when  the  Constitution  went  into  effect  in  1789;  but 
soon  after  that  the  various  states  began  to  grant  state  bank- 
charters  to  numerous  banking  companies,  and  united^**^ 
these  institutions   multipHed  at  a  rapid   rate,   states. 

Many  of  them  were  conducted  with  the  greatest 
recklessness  and  dishonesty,  their  reserves  being  ridicu- 
lously inadequate,  and  their  notes  often  virtually  irre- 
deemable. Although  some  of  the  older  states  adopted 
stringent  laws  to  check  these  abuses,  conditions  continued 
deplorable  in  the  country  as  a  whole  until  the  beginning 
of  the  Civil  War. 

By  a  series  of  laws  beginning  in  1863  Congress  made 
.sweeping  changes  in  this  situation.     A  new  system  of 
national  banks  was  provided  for,  and  elaborate  The 
regulations   for   their   organization,    manage-  Bank^g* 
ment,  and  inspection  were  laid  down.     The  System, 
notes  of  the  state  banks,  which  had  caused  so  much 
trouble,  were  driven  out  of  circulation  by  a  prohibi- 


mo        FkOBLEMS   OF  MONEY  AND   BANKING 

\oxy  i:ax  and  replaced  by  the  notes  of  the  new  national 
banks,  These  notes  were  to  be  secured  by  their  full 
value  in  United  States  bonds,  and  were  made  redeemable 
on  demand  either  at  the  bank  which  issued  them  or  at 
the  national  Treasury,  the  latter  being  provided  for  by 
a  fund  kept  by  the  banks  in  the  Treasury  for  this  purpose. 
The  creditors  of  the  banks  were  further  protected  by  the 
requirement  that  each  bank  should  keep  a  cash  reserve 
of  not  less  than  a  certain  per  cent  cf  its  deposits. 

Experience  with  this  system  gradually  demonstrated 
that  it  provided  safety  at  the  expense  ci  the  equally  im- 
Lack  of  portant  quality  of  flexibility.  The  notes,  in- 
flexibiuty.  stead  of  expanding  and  contracting  according 
to  the  needs  of  trade,  were  limited  by  the  supply  of 
government  bonds,  and  the  extent  to  which  the  available 
bonds  were  utiUzed  for  note  issue  depended  principally 
on  their  market  price.  This  was  because  notes  might  be 
issued  only  up  to  the  par  value  of  the  bonds ;  the  higher 
the  price  of  the  latter  above  par,  therefore,  the  more  ex- 
pensive was  the  issue  of  notes.  Deposits,  now  far  more 
important  than  notes,  were  also  defective  in  this  respect ; 
for  in  practice  the  banks  kept  so  near  the  *' dead-line" 
of  the  minimum  legal  reserve  requirements  that  they 
were  almost  powerless  to  meet  an  unusual  demand  for 
loans.  Withdrawals  of  cash,  indeed,  might  even  compel 
them  to  contract  their  loans  at  such  an  inopportune  time. 

These  difficulties  were  intensified  by  another  char- 
acteristic feature  of  the  system  —  its  decentralization. 
Decentraii-  ^ot  only  did  the  law  provide  no  means  by 
zation.  which  the  activities  of  the  national  banks  (over 

7500  in  number)  might  be  coordinated  and  controlled  for 


BANKS  AS  INSTITUTIONS  OF  CREDIT        157 

the  general  good,  but  by  prohibiting  national  banks  from 
having  branches  it  even  seemed  disposed  to  impede  any 
movement  in  that  direction.  Each  bank  shaped  its 
own  policy,  managed  its  own  reserve,  and  in  time  of 
stress  took  measures  for  protecting  itself  without  much, 
if  any,  regard  for  their  effect  on  other  banks.  The  banks 
of  the  larger  cities,  it  is  true,  cooperated  in  times  of 
panic  by  arranging  to  pay  balances  between  themselves 
by  means  of  Clearing  House  Loan  Certificates,  which 
represented  an  equivalent  amount  of  approved  commer- 
cial paper  deposited  with  a  committee  of  the  Clearing 
House,  instead  of  in  cash,  but  this  expedient  proved 
inadequate. 

§  105.  After  some  twenty  years  of  discussion  Congress 
again  introduced  far-reaching  reforms  by  passing  the  Fed- 
eral Reserve  Act  in  December,  igis-     Under 

,  ^  .        The  Federal 

this  plan  the  country  is  divided  into  twelve  dis-  Reserve 
tricts,^  each  having  a  "federal  reserve  bank," 
the  capital  of  which  is  furnished  by  the  national  banks 
of  the  district  and  by  such  state  banks  as  choose  to  enter 
the  reserve  system.  In  the  reserve  bank  of  their  district 
ihe  "member-banks"  must  keep  deposits  equal  to  a 
specified  per  cent  of  their  own  deposit  liabilities.  This 
constitutes  their  legal  reserve.  They  maintain  these 
i^alances  either  by  depositing  cash  in  the  reserve  bank 
or  by  borrowing  it,  usually  on  the  security  of  com- 
mercial paper  which  they  have  discounted  for  their 
customers  —  an   o|)cration   known   as   "rcdiscounting"  ; 

'The  flistricts  center  in  ihe  fcjllowing  cities:  IJoston,  New  York, 
Philaflelphia,  Cleveland,  Richmond,  Atlanta,  Chicago,  St.  Louis,  Min- 
neapolis, Kansas  City,  Dall  s,  anrl  San  I'"rancisco. 


15^        PROBLEMS  OP  MONEY  AND  BANKING 

and  of  course  they  may  draw  on  their  balances  if  they 
need  additional  cash. 

This  concentration  of  the  reserves  of  the  member- 
banks  in  twelve  central  banks  gives  much  greater  elas- 
CentraH-  ticity  to  our  deposit  currency.  The  reserve 
bank'^  °^  banks  are  required  to  keep  a  reserve  of  at  least 
reserves.  thirty-five  per  cent  of  their  deposits,  and  it  is 
expected  that  the  greater  responsibility  felt  by  these  semi- 
public  institutions  will  lead  them  to  keep  well  above  this 
limit  in  ordinary  times.  They  will  therefore  be  able  to 
furnish  cash  and  to  lend  to  their  members,  should  occa- 
sion arise,  thus  enabling  the  latter  to  lend  freely  to 
business  men,^  a  service  which,  as  we  have  seen,  they 
were  frequently  unable  to  render  under  the  former 
system. 

Equally  important  changes  have  been  made  in  the 

issue  of  bank-notes.     The  inelastic  bond-secured  notes 

have  been  supplemented  ^  by  a  new  issue  known 

reserve  as  federal  reserve  notes.     These  are  obtained 

notes. 

by  the  reserve  banks  from  the  federal  reserve 
agent  of  the  district,^  upon  the  deposit  of  an  equivalent 
amount  of  commercial  paper  which  they  have  redis- 
counted  for  members,  as  described  above,  or  of  gold; 
and  the  reserve  bank  issuing  them  must  keep  a  reserve 

'  It  should  be  noted  that  a  loan  by  a  reserve  bank  enables  the  member- 
bank  to  lend  several  times  that  amount,  since  it  increases  the  member's 
reserve,  i.e.,  its  deposit  in  the  reserve  bank. 

^  It  is  provided  that  under  certain  conditions  the  reserve  banks  may 
take  over  from  the  member-banks  the  bonds  and  the  note-issues  based  on 
them. 

^  The  chairman  of  the  directors  of  the  reserve  bank,  appointed  by 
the  Federal  Reserve  Board  which  is  described  in  the  next  paragraph. 


BANKS  AS  INSTITUTIONS   OF  CREDIT        159 

of  at  least  forty  per  cent  in  gold  of  the  amount  outstand- 
ing. They  are  redeemable  at  any  reserve  bank  or  at 
the  national  Treasury.  Thus  we  have  a  thoroughly 
safe  note-issue  which,  being  based  on  commercial  paper, 
will  adjust  itself  readily  to  changes  in  the  volume  of 
trade. 

In  order  to  provide  unified  control  of  general  policies 
affecting  the  country  as  a  whole,  and  to  insure  a  certain 
degree  of  cooperation  between  the  twelve  re-  The 
serve  banks,   there  is  established  a  Federal  Reserve 
Reserve  Board,  consisting  of  the  Secretary  of  ^o^rd. 
the  Treasury,  the  Comptroller  of  the  Currency,^  and 
five  members  who  are  appointed  by  the  President  for 
long  terms. 

This  body  has  broad  powers  of  supervision,  regulation, 
examination,  and  control.  It  appoints  one  third  of 
the  directors  of  each  reserve  bank,  including  the  chair- 
man; it  may  require  one  reserve  bank  to  lend  to  an- 
other; and  it  may,  under  certain  conditions,  suspend 
any  of  the  reserve  requirements  provided  in  the  Federal 
Reserve  Act.  By  this  arrangement  we  obtain  the 
advantages  of  centralized  control,  while  at  the  same 
time  leaving  matters  of  local  concern  to  local  judgment 
and  initiative. 

There  are  now  over  8700  banks  in  the  federal  reserve 
system,  of  which  over  1000  are  state  banks  and  trust 
companies.     The   following   table  shows  the   some 
growth  of  the  federal  reserve  banks  since  their   statistics, 
organization  : 

'  An  official  of  the  Treasury  Department  having  general  supervision 
over  the  national  banks. 


l6o        PROBLEMS   OF  MONEY  AND   BANKING 

FEDERAL  Reserve  Banks  —  Combined  Statements 
(In  million  d hilars) 


Date 

Gold 
Holdings 

Loans 

Deposits 

Fed.  Res. 

Notes 

Reserves ' 

Dec.  1914 
Dec.  1916 
Dec.   1918 

240 

737 
2090 

10 

157 
2005 

256 
650 

1553 

16 

275 

2  85 

98% 
81% 
50% 

in.   Bimetallism 

§  106.  Prior  to  the  nineteenth  century  many  countries 
had  permitted  the  free  coinage  of  both  gold  and  silver  at 
National  ratios  varying  from  about  fifteen  to  fifteen  and 
bimetaiusm.  ^  j^^jf  grains  of  silver  for  each  grain  of  gold 
contained  in  their  coins.  The  result  was  that,  as  often 
as  the  market  value  of  either  metal  changed,  the  coins 
that  were  overvalued  drove  the  others  out  of  circulation. 

In  the  United  States,  for  instance,  our  first  coinage  sys- 
tem, established  in  1792,  provided  for  the  free  coinage  of  a 
The  experi-  silver  dollar  containing  371.25  grains  of  fine 
United^  *^®  metal  and  a  gold  eagle  with  fine  contents  of  247.5 
States.  grains.    This  estabUshed  a  proportionate  valua- 

tion of  fifteen  to  one,^  which  was  approximately  the  correct 
market  ratio  at  the  time  the  law  was  passed ;  but  very 
soon  silver  fell  in  value,  so  that  15.61  grains  were  required 
in  the  bullion  market  to  purchase  one  grain  of  gold.  The 
result  was  that  gold  could  not  circulate  by  the  side  of  sil- 
ver coins  valued  at  the  ratio  estabhshed  in  1792,  and  the 
country  was  thrown  on  a  silver  basis.     In  1834  and  1837 

1  Ratio  of  total  cash  holdings  to  total  demand  liabilities. 

2  Since  the  eagle  weighed  247.5  grains,  the  law  rated  24.75  grains  of 
fine  gold  as  equivalent  to  371.25  grains  of  silver,  or  fifteen  to  one. 


BIMETALLISM  i6l 

Congress  cut  down  the  contents  of  the  eagle  to  232.2 
grains  in  order  to  bring  gold  back  into  circulation.  This 
action  estabHshed  a  ratio  of  15.988  to  i  —  known  ever  since 
as  sixteen  to  one  —  by  which  silver  was  shghtly  under^ 
valued,  and  gold  was  enabled  gradually  to  displace  it. 
The  Californian  discoveries  had  the  effect  of  lowering 
still  farther  the  value  of  gold;  so  that,  in  1853,  the  silver 
contained  in  a  dollar  was  worth  $1.04,  and  the  coin  had 
gone  wholly  out  of  use.  Thus  our  currency  was  placed 
upon  a  gold  basis,  and  remained  there  until  the  issue  of 
greenbacks  in  1862  introduced  an  era  of  depreciated  paper 
money. 

§  107.  In  1816  England  had  debased  her  silver  coins, 
made  them  legal  tender  only  for  small  payments,  and 
established  gold  as  the  sole  standard  of  value.  G^id  mono- 
This  movement  toward  gold  monometallism  metaiiism. 
was  greatly  accelerated  when,  in  1871  and  1873,  the  newly 
formed  German  Empire  established  a  national  gold  coin- 
age, and  withdrew  most  of  the  silver  coins  that  had  for- 
merly circulated  in  the  various  German  states.  At  about 
the  same  time  the  United  States,  with  a  view  to  the  future 
resumption  of  specie  payments,  began  to  revise  its  coinage 
laws;  and  in  1873  finally  dropped  from  its  list  of  author- 
ized coins  the  obsolete  silver  dollar  which  was  still  worth 
more  than  the  gold  dollar.  This  action  put  an  end  to  the 
free  coinage  of  silver,  and  by  it  that  metal  is  said  to  have 
been  "demonetized."  The  law  of  1873  was  passed  for 
the  purpose,  repeatedly  expressed  in  Congress,  of  making 
gold  the  sole  standard  of  value  when  specie  payments 
should  be  resumed;  yet  it  has  been  charged,  wrongly, 
that  the  measure  was  enacted  "secretly"  or  "inadvert- 


1 62        PROBLEMS  OF  MONEY  AND  BANKING 

ently"  or  even  "fraudulently."  The  fact  is  that  no  one 
was  interested  in  the  fate  of  a  silver  dollar  that  was  vv^orth 
$1.02  in  gold,  and  thac  no  interest  would  have  been  mani- 
fested in  it  subsequently  if  the  depreciation  of  silver  had 
not  made  it  cheaper  than  our  standard  gold  coins. 

§  108.    Meanwhile    France,    Italy,    and    some    smaller 

countries  had  organized  the  Latin  Monetary  Union,  and 

established  the  free  coinage  of  both  silver  and 

The  Latin  ° 

Monetary  gold  at  a  ratio  of  15.5  to  I.  The  large  produc- 
tion of  gold  in  CaHfornia  and  Australia  had  long 
kept  the  value  of  that  metal  so  low  that  it  had  flowed  in 
large  quantities  to  the  French  mints;  but  after  1870  the 
output  of  silver  was  enormously  increased,  and  its  value  in 
turn  declined.  The  result  was  that  silver  began  to  flow  in 
excessive  quantities  to  the  mints  of  the  Latin  Union,  so 
that  it  becam.e  necessary  to  restrict  the  coinage  of  that 
metal;  in  1876,  indeed,  when  the  ratio  had  become  17.75 
to  I,  the  French  mints  were  closed  to  silver. 

§  109.   Since  1876  all  changes  in  the  monetary  situation 

have  tended  toward  the  general  adoption  of  a  single  gold 

standard  and  the  relegation  of  silver  to  a  place 

Supremacy  ,  »  •  i    t>        • 

of  the  gold  as  subsidiary  currency.  Austria  and  Russia 
have  endeavored  to  free  themselves  from  de- 
preciated paper  currencies,  and  to  place  their  systems  on 
a  gold  basis ;  and  the  coinage  of  silver  has  been  restricted 
in  many  countries.  The  peoples  of  Asia  and  South  Amer- 
ica had  from  time  immemorial  employed  silver  as  their 
principal  money  metal,  but  in  1893  India  was  compelled 
to  discontinue  free  coinage  of  the  silver  rupee.  After 
that  the  movement  away  from  silver  extended  to  Japan 
and  various  other  counlnes.     The  result  has  been  that 


BIMETALLISM  163 

the  opening  of  the  twentieth  century  finds  silver,  which 
prior  to  the  nineteenth  century  had  been  the  more  com- 
mon medium  of  exchange,  relegated  to  the  position  of  an 
inferior  currency,  subsidiary  to  gold. 

§110.  This  change  has  not  come  about  without  pro- 
test, especially  in  the  United  States.  In  1876,  with  the 
resumption  of  specie  payments  approaching  Thesiivgr 
at  the  end  of  1878,  it  was  seen  that  the  silver  "^^^^^^t 
dollar,  then  worth  but  ninety  cents,  would  be  states. 
able  to  displace  gold  if  the  famous  law  of  1873  had  not 
stricken  it  from  the  list  of  authorized  coins.  Immediately 
there  began  a  demand  for  the  free  coinage  of  silver,  and 
the  "silver  issue"  made  its  appearance  in  national  politics. 
In  1878  the  Bland-Allison  Act  was  passed,  which  required 
the  government  to  purchase  a  certain  quantity  of  silver 
at  the  market  price  each  year,  and  coin  it  into  dollars  con- 
taining 371.25  grains  of  fine  metal.  Under  this  act, 
8378,166,723  of  silver  had  been  injected  into  circulation 
by  1890,  when  Congress  passed  the  Sherman  Act,  provid- 
ing for  increased  purchases  of  silver  against  which  legal- 
lender  notes  were  issued.^  The  act  of  1878  had  effected 
a  gradual  substitution  of  silver  for  gold,  and  the  increased 
inflation  of  cheap  money  authorized  by  the  Sherman  Act 
led  to  a  more  rapid  exportation  of  the  yellow  metal.  There 
is  no  question  that  a  few  more  years  would  have  placed 
the  country  upon  the  silver  basis,  by  causing  the  complete 
riisj)lacemcnt  of  gokl.  In  1893,  however,  a  disastrous 
panic  intervened,  which  was  thought  to  be  due  in  some 

'  Of  these  notes  about  $156,000,000  were  issued.  They  were  called 
Sherm.an  notes,  or  notes  of  i8qo.  Only  about  §1,858,000  remained  in 
existence  at  the  end  of  191 1,  the  rest  havinj^  been  retired.  The  silver 
purchased  by  the  notes  has  been  cfjintd  into  standard  dollars. 


1 64       PROBLEMS  OF  MONEY  AND  BANKING 

degree  to  the  operation  of  the  law  of  1890;  and,  after  a 
protracted  struggle  in  Congress,  the  Sherman  Act  was 
repealed.  This  action  fanned  the  agitation  into  a  fiercer 
blaze  than  ever  before,  and  the  presidential  election  of 
1896  turned  almost  solely  upon  the  issue  of  establishing 
the  free  and  unlimited  coinage  of  the  silver  dollar,  then 
worth  only  fifty-two  cents.  The  defeat  of  the  silver  party 
finally  disposed  of  this  troublesome  question  which  had 
vexed  the  country  for  twenty  years.  There  is  no  reason 
to  doubt  that  if  free  coinage  of  silver  had  been  permitted, 
the  operation  of  Gresham's  law  would  have  placed  the 
nation  on  a  silver  basis,  and  would  have  decreased  ulti- 
mately by  almost  fifty  per  cent  the  purchasing  power  of 
the  medium  in  which  debts  are  paid. 

§  III.  For  a  single  nation  to  attempt  free  coinage  of 
silver  at  any  such  ratio  as  sixteen  to  one  is  now  generally 
International  Conceded  to  be  the  height  of  folly.  But  for 
bimeteiiism.  thirty  or  forty  years  international  bimetallism 
—  another  and  very  different  proposition  —  has  occa- 
sioned much  discussion.  The  displacement  of  silver  as 
standard  money  and  the  increased  use  of  gold  assumed 
large  proportions  at  the  very  time  when  the  world's  gold 
production  began  to  show  signs  of  decrease.  Simulta- 
neously there  commenced  a  downward  movement  of  prices, 
by  which  the  purchasing  power  of  the  gold  dollar  stead- 
ily rose  from  1873  to  1897.  This,  naturally  enough,  occa- 
sioned much  discontent  and  lent  great  interest  to  schemes 
for  the  establishment  of  international  bimetallism,  by 
which,  it  was  hoped,  an  increased  use  of  silver  would  be 
made  possible  and  the  fall  of  prices  would  be  checked, 

§  112.   BimetalHsts   urged   that  the   continual   fall  of 


BIMETALLISM  1 65 

prices  increased  the  burden  of  all  debts  growing  out  ol 
contracts  that  ran  for  a  term  of  years,  and  their  conten- 
tion has  never  been  successfully  refuted.  If  it  Argumeats  in 
is  unjust  to  permit  debtors  to  pay  creditors  in  ^^^  favor, 
money  of  inferior  purchasing  power,  it  must  be  equally  so 
to  require  them  to  pay  their  debts  in  a  medium  of  which 
the  purchasing  power  has  increased;  debased  currency 
is  no  more  inicjuitous  than  a  currency  that  steadily  appre- 
ciates. Moreover,  it  was  argued  that  falling  prices  have 
an  injurious  effect  upon  industry,  since  they  steadily 
diminish  the  amount  of  money  that  producers  can  get  in 
exchange  for  their  commodities.  Bimetallists  contended 
that  the  fall  of  prices,  depressing  enterprise  and  injuring 
debtors,  was  due  to  the  fact  that  silver  had  been  partially 
"demonetized,"  and  gold  had  been  made  the  sole  standard 
cf  value;  they  urged,  therefore,  that  the  leading  nations 
should  enter  into  an  agreement  to  permit  both  gold  and 
silver  to  be  employed  as  money  at  some  proper  ratio. 

Debate  between  the  bimetaUists  and  the  advocates  of 
monometallism  turned  upon  the  questions  of  the  evils 
caused  by  falhng  prices,  the  cause  of  the  fall.  The  fan  of 
and  the  efficacy  and  practicability  of  the  pro-  p""* 
posed  remedy.  The  arguments  advanced  by  some  mono- 
metallists  to  prove  that  falling  prices  do  not  wrong  debtors 
and  are  a  good  thing  for  business  do  not  present  an  im- 
pressive appearance.^  Turning  to  the  causes  for  the  fall 
of  prices  after  1873,  it  seems  tolerably  clear  that  the  mono- 
metallists  were  not  successful  in  their  contention  that  an 
increased  demand  for  gold  money  had  nothing  to  do  with 

'  For  in'^tance,  if  the  fallinf;  prices  prior  to    1S97  were  a  good  thing 
for  bu»inc&S;  have  the  rising  prices  since  that  d^c  been  »  bad  thing  ? 


l66        PROBLEMS    OF  MONEY  AND  BANKING 

the  change  in  the  price  level.  Doubtless  bimetallists 
exaggerated  the  influence  of  the  changes  in  the  relative 
demands  for  gold  and  silver  for  monetary  purposes;  yet 
it  seems  reasonable  to  suppose  that,  as  one  nation  after 
another  began  to  use  gold  in  preference  to  silver,  the 
growing  demand  for  the  former  metal  and  the  narrowing 
demand  for  the  latter  tended  to  raise  the  value  of  the  one 
and  to  depress  that  of  the  other.  The  fall  in  silver  was, 
of  course,  greatly  accelerated  by  the  very  large  increase 
in  the  production  of  that  metal  after  1870, 

The  serious  issue  between  the  two  parties  to  the  debate 
was  the  efficacy  and  practicability  of  the  remedy  proposed 
Practicabii-  by  the  bimetallists.  The  monometallists  ar- 
Mmetaiiic  g^^^  that  all  experience  showed  that  the  market 
standard.  ratio  between  gold  and  silver  had  always 
fluctuated;  and  that  this  fact  demonstrated  that  it  always 
would  fluctuate,  with  the  result  that,  at  the  established 
legal  ratio,  one  metal  would  always  be  cheaper  than  the 
other  and  would  enjoy  exclusive  circulation.  The  bimet- 
allist  rephed  that  if  all  the  principal  nations  entered  the 
agreement,  gold,  if  it  should  happen  temporarily  to  be 
undervalued,  would  not  be  driven  entirely  out  of  use  by 
the  cheaper  silver  coins.  They  argued  that  Gresham's 
law  cannot  operate  if  there  is  no  country  where  the  dearer 
metal  can  go  the  moment  that  it  begins  to  be  displaced  by 
the  cheaper.  At  the  present  time  something  more  than 
$8,000,000,000  of  gold  circulates  in  the  principal  lanjs  of 
the  earth ;  and  the  bimetalhsts  believed  that  such  a  quan- 
tity of  metal  could  not  be  driven  out  of  use  as  money  ^  and 

1  It  is  at  this  point  that  international  bimetallism  differs  from  the  pro- 
posal  to  adopt  free  coinage  of  silver  in  a  single  country.    Under  the  latter 


BIMETALLISM  167 

ihrown  intc  the  melting  pot  without  lowering  the  value  oi 
gold  to  a  point  that  would  reestablish  its  parity  v»'ith  silver 
at  the  legal  ratio.  Moreover,  it  was  said  that,  as  geld 
should  begin  to  leave  the  channels  of  circulation,  there 
would  be  a  proportionate  increase  in  the  demand  for  sil- 
ver money,  by  which  the  value  of  that  metal  would  be 
given  an  upward  turn.  On  this  point  there  may  be  room 
for  considerable  difference  of  opinion,  but  the  behef  of 
the  writer  has  always  been  that,  on  the  assumption  that 
a  world-wide  agreement  is  attained,  the  bimetallist  had  the 
best  of  the  controversy. 

§  113.  The  strength  of  the  argument  of  the  monometal- 
lists  lay  in  their  contention  that  a  bimetallic  agreement,  how- 
ever desirable  it  might  be,  could  not  be  reached 

^  '  The  strength 

by  all  the  leading  nations;    and,   if  reached,  of  opposing 

,  ,  ,  .        .  .  ,  .  arguments. 

would  not  be  certam  of  contmued  mamtcnance. 
As  a  matter  of  fact  repeated  conferences  were  held  by 
various  countries,  including  the  United  States,  which  has 
constantly  tried  to  "do  something"  for  silver;  but  there 
has  never  been  any  prospect  that  England,  and  perhaps 
Germany,  would  abandon  the  gold  standard.  The  vast 
comxmerce  of  Englanrl  has  been  built  up  since  1816  upon 
the  basis  of  the  stability  of  the  gold  sovereign,  and  English 
merchants  are  not  willing  to  take  any  chances  with  a 
system  dependent  on  international  agreement.  Germany 
adopted  the  gold  standard  partly  for  ])olitical  leasons; 
and  although  there  has  been  a  strong  bimetallist  move- 
ment in  that  country,  it  has  never  seemed  probable  that 
the  government  would  accept  an  international  agrcemcnl 

condition,  geld  couM  be  txpcrted  to  many  other  countiits  to  be  used  as 

IDCDe>. 


1 68        PROBLEMS  OF  MONEY  AND  BANKING 

for  the  free  coinage  of  silver.     This,  then,  was  the  rock 

on  which  the  projects  of  the  bimetaUists  always  shattered. 

§  114.    If  the  gold  production  had  remained  as  small 

as  it  was  so  late  as  1890,  and  prices  had  continued  to  fall, 

it   is  probable  that   international  bimetallism 

Conclusion.  i  ,  -n     i  •  r       •      i     •  n 

would  still  be  a  topic  of  vital  interest.  But 
the  enormous  increase  in  the  output  of  gold,  which  at 
length  caused  an  upward  movement  of  prices,  has  produced 
the  very  condition  for  which  the  bimetallists  contended,  — 
a  larger  volume  of  money  that  would  check  the  decline  of 
prices.  It  has  also  deprived  their  schemes  of  all  present 
importance,  and  made  bimetallism  a  topic  of  purely  aca- 
demic interest.  So  long  as  the  world's  gold  output  con- 
tinues to  be  as  large  as  $450,000,000  annually,  the  gold 
standard  will  not  be  replaced  by  a  bimetalhc  agreement. 

FOR   SUPPLEMENTARY   STUDY 

General:  Bullock,  Selected  Readings  in  Economics,  406-430; 
Hadley,  Economics,  207-231,  241-263;  Nicholson,  Po- 
litical Economy  II,  125-130,  140^205 ;  Seager,  Introduction 
to  Economics,  310-360;  Taussig,  Principles  of  Economics, 
Bk.  III. 

Special:  Bullock,  Essays  in  the  Monetary  History  of  the 
United  States,  29-121  ;  Dunbar,  Theory  and  History  of 
Banking,  1-94,  158-190;  Jevons,  Money  and  the  Mechan- 
ism of  Exchange,  192-284;  Kinley,  Money,  chs.  XIV- 
XVII;  PmLLips,  Readings  in  Money  and  Banking,  chs. 
V-VII,  XXX,  XXXI ;  WmxE,  Money  and  Banking,  Bk.  II, 
Bk.  Ill,  chs.  I-XIV,  XX-XXII;  Willis,  The  Federal 
Reserve  System. 


CHAPTER  IX 

MONOPOLIES 
I.   Introduction 

§  115.  Monopoly  means  such  control  over  the  supply 
of  a  commodity  as  confers  the  power  to  fix  the  price.  It 
may  be  secured  either  by  buying  up,  "corner-  Monopoly 
ing,"  the  major  part  of  the  available  stock,  defined. 
or  by  acquiring  the  exclusive  or  substantially  exclusive 
power  to  produce  the  commodity.  Control  secured  in  the 
first  manner  can  be  only  temporary,  because  efforts  to 
"corner"  the  supply  in  order  to  raise  prices  merely  tempt 
more  capital  into  an  industry  and  increase  the  output; 
if,  however,  control  is  attained  in  the  second  way,  there 
may  be  a  prospect  of  permanent  success. 

An  absolute  mastery  of  supply,  and  hence  of  prices,  sel- 
dom or  never  exists,  since  it  is  generally  possible  to  procure 
substitutes  for  a  monopolized  commodity,  and  ^^^g^j^^g 
this    will  be  done  to   an   increasing  extent  as  monopoly 

impossible. 

charges  are  raised.  Soft  coal  or  coke  may  be 
used  instead  of  anthracite,  cotton  may  be  employed  in  place 
of  wool,  electricity  may  be  utilized  instead  of  illuminating 
oil,  and  many  similar  substitutions  can  be  effected.  This 
consideration  is  not  a  defence  or  justification  of  the  action 
of  the  monopolizer  who  puts  consumers  to  the  trouble  of 

169. 


1 70  MONOPOLIES 

devising  substitutes,  which  are  often  inferior  to  the  origi- 
nal article;  but  it  does  set  an  ultimate  limit  beyond  which 
the  power  of  a  monopoly  cannot  extend. 

Then,  again,  the  monopolist  is  likely  to  be  disturbed  by 

the  constant  estabhshment  of  rivai  enterprises  which  are 

called  into  existence  by  the  high  prices  that  he 

Difficulty  of  !■    ^ 

suppressing  maintains.  Our  most  successful  trusts  have 
compe  1  ion.  ^^-^^^  produccd  more  than  eighty  to  ninety-five 
per  cent  of  the  products  which  they  controlled;  and  the 
higher  that  prices  are  raised,  the  larger  becomes  the  num- 
ber of  rival  establishments.  The  fear,  therefore,  of  possible 
competition  may  sometimes  limit  the  power  of  a  combina- 
tion over  the  price  of  a  monopohzed  commodity. 

§  116.   Upon  the  facts  that  substitution  is  possible  and 

competition  is  probable  if  prices  are  raised  to  exorbitant 

figures,  the  apolosrists  for  monopoly  have  based 

Denials  of  the       &  '  ^       f  ^     -' 

existence  of  the  claim  that  there  are  few  or  no  monopolies 
monopo  les.  .^  ^^^  United  States.  Monopoly,  however,  does 
not  mean  absolute  control;  it  means  merely  the  power  to 
raise  prices  somewhat  above  the  marginal  cost  of  produc- 
tion, the  point  at  which  competitive  prices  are  fixed.  The 
employment  of  substitutes  does  not  begin  until  prices 
are  raised  above  the  competitive  level,  and  the  fact  that 
a  few  independent  concerns  furnish  ten  or  twenty  per  cent 
of  the  product  does  not  keep  prices  down  to  the  mar 
ginal  cost  of  production.  For  most  practical  purposes, 
control  over  seventy,  eighty,  or  ninety  per  cent  of  the 
supply  confers  the  power  to  raise  prices,  and  answers  all 
the  objects  of  the  monopolist.  In  fact,  it  is  frequently 
advantageous  to  have  the  appearance  of  competition 
tnaintained,  since  this  makes  it  easier  to  delude  the  public 


IN-TR  OD  C/CT/Oy  1 7 1 

§  117.  If  we  leave  out  of  account  exceptional  cases  in 
which  the  possession  of  extremely  rare  artistic  or  business 
skill  confers  monopolistic  power  upon  a  person, 

d3SS6S  01 

we  can  divide  monopolies  into  three  classes,  monopolies: 
First  in  order  we  may  place  legal  monopolies, 
which  are  dependent  upon  an  exclusive  grant  from  a  gov 
ernment ;  they  may  be  either  private  or  public  in  character. 
In  the  one  case  the  government  grants  an  exclusive  privi- 
lege to  an  individual  or  group  of  persons ;  in  the  other,  \\ 
reserves  to  itself  the  sole  power  to  conduct  some  enter- 
prise. Private  legal  monopolies  were  secured  in  early 
times  through  the  mere  favor  of  the  sovereign;  but  to- 
day, as  with  patents  and  copyrights,  they  are  granted 
for  a  limited  term  of  years  for  the  purpose  of  encourag- 
ing invention  and  fostering  letters.  In  some  industries 
patents  have  become  an  important  factor  in  developing 
and  maintaining  large  monopolies.  Public  legal  monopo- 
lies may  be  established  in  order  to  provide  for  the  better 
administration  of  some  important  service,  as  the  postal 
department;  or  may  be  created  as  the  best  method  of 
taxing  the  people,  as  the  tobacco  monopoly  in  France.  In 
the  one  case  prices  may  be  kept  low  in  order  to  encourage 
the  extensive  use  of  the  service;  in  the  other,  they  will 
be  made  high  enough  to  bring  in  the  maximum  profits. 
Sometimes,  indeed,  the  two  purposes  are  more  or  less 
mingled  in  the  same  enterprise,  as  in  the  Prussian  railway 
service,  which,  although  originally  undertaken  for  other 
purposes,  has  become  a  source  of  large  revenue. 

Second  in  order  are  natural  monopolies,  which  arise  on 
account  of  peculiar  projicrties  inherent  in  certain  lines  of 
business.      Many   natural  agents  of   production  are  nar- 


1 72  MONOPOLIES 

rowly  limited  in  supply,  and  the  limitation  is  frequently  so 
strict  that  it  is  possible  for  a  group  of  persons  to  acquire 
(2  Natural  control  of  them.  Practically  all  of  the  anthra- 
monopoiies.     ^,jjg  ^^^  of  ^}^g  United  States  is  found  in  a 

comparatively  small  area  in  Pennsylvania,  and  it  has  been 
possible  for  a  group  of  railways,  in  defiance  of  express 
provisions  of  law,  to  acquire  a  monopoly  of  hard  coal. 
So,  too,  petroleum  fields,  deposits  of  copper  and  iron  ores* 
water  powers,  irrigation  facilities,  water  fronts  of  large 
cities,  and  many  other  natural  agents  are  so  limited  in 
extent  as  to  fall  into  the  control  of  a  small  number  of 
persons  or  companies.  Such  a  condition  is  very  favor- 
able for  the  growth  of  a  monopoly,  although  this  result 
may  not  appear  in  all  cases. 

A  second  group  of  natural  monopolies  originates  from 

the  fact  that  certain  products  or  services  can  be  consumed 

only  in  connection  with  an  expensive  distrib- 

Natural  /  ^  ,    , 

monopolies      uting  apparatus.     Gas,  water,  and    electricity 

'^continued).  ,  ^•      ^  ^  11 

can  be  suppned  only  to  persons  who  have 
connected  their  houses  or  factories  with  the  mains,  pipes, 
or  wires  required  for  their  distribution.  Street  or  steam 
railways  can  reach  their  customers  only  by  constructing 
tracks  in  certain  localities,  and  the  telegraph  and  telephone 
present  the  same  conditions.  In  all  these  cases  it  is 
cheaper  for  one  company  to  supply  a  given  district  than 
for  two  concerns  to  duplicate  the  distributing  plants  and 
compete  for  business.  Accordingly,  whenever  competi- 
tion is  attempted,  capital  is  wasted  in  needless  duplication 
of  pipes,  tracks,  or  wires;  and  the  managers  of  rival 
concerns  perceive,  sooner  or  later,  that,  even  apart  from 
the  possibility  of  raising  prices,  more  money  can  be  maae 


MONOPOLY  VALUE  173 

by  forming  a  combination  and  eliminating  unnecessar}i 
expense  for  the  distribution  of  the  service.  For  this 
reason  monopoly  may  be  regarded  as  the  condition  that 
must  ultimately  prevail  in  such  an  industry. 

The  so-called  capitahstic  monopoHes  constitute  a  third 
class.  They  have  been  formed  in  many  branches  of 
manufacturing  industn'  that  do  not  seem  to 

.  '  .  .  (3)  Capital- 

possess  the  characteristics  attributed  to  natu-   isticmonop 

ral  monopohcs;  and  it  is  alleged  that  they  are 
due  to  the  economies  that  result  from  the  combination  of 
competing  enterprises.  If  this  should  turn  out  to  be  the 
case,  it  would  seem  that  they  must  be  considered  just  as 
natural  as  the  monopolies  in  the  gas,  water,  or  electric- 
lighting  industries;  so  that  the  distinction  between  our 
second  and  third  classes  would  disappear.  The  belief  of 
the  writer,  however,  is  that  this  is  not  the  case,  as  will  be 
set  forth  in  a  later  part  of  this  chapter. 

II.    Monopoly  Value 

§  ii8.   Whenever  competition  prevails,  it  is  in  the  in- 
terest of  every  producer  to  increase  his  output  as  long  as  the 
price  remains  high  enough  to  yield  him  a  profit;  The  deter- 
since,   if  he  should   curtail  production,   other  monopoly"* 
concerns  would  extend  their  sales  at  his  ex-  '^aiues. 
pense.     The  monopolist,  however,  possessing  for  the  time 
being  an  effective  control  over  the  industry,  is  able  to 
restrict  the  output  and  to  raise  the  price  of  the  commodity 
to  such  a  point  as  proves  to  be  most  j)rofitable.     For  this 
reason  the  value  of  a  mono[)oly  jjroduct  will  not  be  gov- 
erned by  the  same  principles  that  apply  when  competition 
exists.     The  general  law  of  monopoly  prices  is  that  they 


174  MONOPOLIES 

will  be  adjusted  in  such  a  manner  as  to  yield  the  monopo 
list  the  largest  profits  obtainable  from  the  industry;  orj 
in  technical  language,  will  be  fixed  at  the  point  of  high- 
est net  returns.  In  determining  where  this  point  is,  the 
intelligent  monopolist  will  take  into  account  the  following 
considerations :  — 

(i)  As  the  price  is  raised  above  the  former  level  estab- 
lished by  competition,  the  demand  will  inevitably  decline, 
and  the  monopolist  must  reduce  his  output.  If  he  does 
not  pursue  this  course,  part  of  his  goods  will  remain  un- 
sold at  the  price  which  he  desires  to  maintain.  With 
articles  of  voluntary  consumption,  the  demand  falls  off 
ver)'  rapidly  as  the  price  is  raised,  so  that  the  power  of 
ihe  monopoHst  is  quickly  limited  by  reason  of  the  fact  that 
exorbitant  charges  decrease  the  sales  faster  than  they 
increase  the  profits  on  each  article  sold.  With  neces- 
sities, the  power  of  the  monopolist  is  greater;  and  prices 
can  be  raised  very  materially  before  the  sales  decline  enough 
to  make  further  increase  unprofitable. 

(2)  Certain  expenses  of  production  increase  or  decrease 
nearly  proportionately  with  corresponding  changes  in  the 
product;^  while  others  remain  absolutely  or  approxi- 
mately the  same  however  large  the  output  may  be  (§  69). 

(3)  The  maximum  net  revenue  that  may  be  obtained 
is  determined  by  disregarding  all  the  fixed  expenses,  and 
by  studying  with  care  (a)  the  quantity  of  the  product 
whirh  consumers  will  demand  at  various  prices,  and  {b) 
the  variable  expenses  chargeable  to  each  unit  of  the  supply. 

^  Sometimes  the  variable  expenses  will  decrease  as  the  output  is 
enlarged^  when  considerable  advantages  attend  production  on  a  larget 
Scale. 


MONOPOLY   VALUE 


175 


§  119.   The  problem  will  be  made  clearer  if  we  consider 
the   assumed   case   of  a   street   railway   company   which 
monopohzes  the  traffic  of  a  small  city.     Sup-  The  law  of 
pose  that  the  fixed  expenses  of  such  a  company  ^a^ue^iius- 
for  interest  on    the  bonded  debt,   salaries  of  trated. 
principal    officials,  and    other    similar    items  amount  to 
$40,000  annually;  and  assume  that  the  variable  expenses 
amount   to    2    cents   for   each   passenger  carried.     Then 
suppose  that  a  fare  of  10  cents  will  induce  600,000  persons 
to  patronize  the  company  in  the  course  of  the  year,  and 
that  lower  fares  increase  the  traffic  until  a  price  of  3  cents 
attracts  4,000,000  passengers.     The  elements  which  the 
company  will  study  in  determining  what  fare  to  charge 
are  shown  in  the  following  table:  — 


Fare 

Passengers 
Carried 

Total 
Earnings 

Variable 
Expenses 

Net 
Earnings 

Fixed 
Expenses 

Net 
Revenue 

10 

600,000 

$60,000 

$12,000 

$48,000 

$40,000 

$8,000 

8 

800,000 

64.000 

1 6,000 

48,000 

40,000 

8.000 

6 

1 ,400,000 

84,000 

28.000 

56,000 

40,000 

1 6,000 

5 

2,000,000 

100,000 

40.000 

60,000 

40,000 

20.000 

4 

2.500,000 

100,000 

50,000 

50,000 

40,000 

10,000 

3 

4,000,000 

1 20,0C0 

80,000 

40,000 

40,000 

Under  the  conditions  here  represented  it  is  evident  that 
the  total  receipts  of  the  company  steadily  increase  until  a 
fare  of  x  cents  is  reached;    and  that,  if  the 

^  _  '  '  The  illustra 

variable  expenses  did  not  affect  the  problem,  tion  further 
the    largest    profits    would    be    obtained    by 
establishing    this   low   charge.      But    when    the    variable 
expenses  are  taken  into  account,  it  is  seen  that  5  cents 


176  MONOPOLIES 

will  be  the  most  profitable  fare;  since  from  10  cents 
down  to  5  the  traffic  increases  faster  than  the  variable 
expenses;  while  below  that  point  these  expenses  increase 
more  rapidly  than  the  traffic.  It  is  obvious,  too,  that 
the  fixed  expenses  never  enter  into  the  calculation.  A 
fare  that  yields  the  largest  net  income  above  the  variable 
expenses  will  also  afford  the  largest  amount  of  revenue 
that  can  be  secured  for  meeting  the  fixed  charges.  If,  in 
this  case,  the  net  earnings  with  a  5 -cent  fare  had  been 
insufficient  to  defray  the  fixed  charges,  the  company 
would  only  have  made  the  situation  worse  by  adopting  a 
different  rate;  as  it  is,  our  figures  show  that  all  expenses 
can  be  met,  and  that  $20,000  will  still  remain  available  for 
dividends  to  the  stockholders.  A  monopoly  price,  there- 
fore, does  not  mean  the  price  that  the  most  necessitous 
consumer  would  conceivably  pay,  but  one  that  yields  the 
highest  net  returns;  for,  indeed,  if  the  demand  for  a 
commodity  is  very  elastic,  it  may  happen  that  the  monopo- 
list cannot  raise  the  price  far  above  the  point  at  which 
competition  would  have  placed  it. 

III.  Natural  Monopolies 

§  120.  It  is  now  generally  recognized  that  perma- 
nent competition  cannot  be  expected  in  industries  that 
Municipal  exhibit  the  characteristics  attributed  to  nat- 
monopoiies.  ^j-^j  monopolies.  When  American  cities  first 
began  to  require  extensive  waterworks,  lighting  facih- 
ties,  and  means  of  transportation,  it  was  generally 
supposed  that  the  way  to  secure  good  service  and  low 
prices  was  to  charter  a  number  of  competing  companies. 
In  this  manner  enormous  amounts  of  capital  were  wasted, 


NATURAL  MONOPOLIES  177 

while  the  anticipated  competition  always  proved  illusory. 
In  many  cases  the  rival  companies  were  consolidated; 
and  where  this  was  prevented  or  considered  inexpedient, 
they  formed  secret  agreements  to  keep  out  of  one  another's 
territory  and  to  maintain  high  charges.  The  growth  of 
the  cities  has  served  merely  to  increase  the  gains  of  com 
panics  enjoying  municipal  franchises,  and  these  ]>rofits 
have  been  concealed  by  issuing  watered  stock  upon  which 
moderate  rates  of  dividend  could  be  paid.^ 

§  121.  Even  more  serious  have  been  the  political  evils 
which  have  flowed  from  these  conditions.  Municipal 
franchises  are  so  profitable  that  the  temptation  Political 
to  secure  them,  on  terms  unfavorable  to  the  <=<"'™p*^'°°- 
city,  by  corrupt  means  has  been  too  strong  to  be  resisted. 
Originally  the  franchises  were  bestowed  without  thought 
of  their  actual  or  prospective  value;  and  it  is  only  within 
a  short  time  that  we  have  awakened  to  the  fact  that  cor- 
rupt boards  of  aldermen  have  been  bartering  away  the 
birthright  of  all  the  people  to  powerful  corporations  that 
use  the  privileges  accorded  them  for  the  purpose  of  exact- 
ing extortionate  gains.  Gradually  the  poison  of  bribery 
has  worked  itself  into  all  parts  of  our  municipal  govern- 
ments, and  has  extended  to  the  state  legislatures^  which 
have  the  power  to  control  local  bodies.     The  notorious 

1  A  street  railroad  which  costs  {gi.ooo.ooo  to  build  and  can  earn 
%\tp,000  a  year  must  pay  15  per  cent  dividends  in  order  to  distribute  the 
earnings  among  the  stockholders.  Now  by  issuing  52,000,000  of  watered 
stock  and  increasing  the  capitalization  to  83,000,000,  the  moderate  rate 
of  5  per  cent  will  distribute  the  earnings.  The  company  will  then  deny 
that  its  earnings  are  exorbitant;  and  will  oppose  attempts  to  reduce  fares, 
on  the  ground  that  if  charges  are  reduced  it  will  not  he  able  to  pay  the 
very  moderate  rate  of  5  per  cent  to  the  widows  and  orphans  who  hav« 
purchased  its  stuck. 


178 


MONOPOLIES 


evils  of  American  city  governments  are  not  due  to  ignorant 
foreign  voters,  or  to  the  alliance  of  the  police  force  with 
vice,  to  any  such  extent  as  they  are  attributable  to  the 
misdeeds  of  those  who  consider  themselves  respectable 
citizens  and  the  leaders  in  financial  or  social  circles;  for 
back  of  the  "boodle  alderman"  one  always  finds  the 
respectable  banker  or  the  eminent  financier.  The  piracy 
of  municipal  franchises,  in  fact,  is  the  principal  cause  of 
the  corruption  and  inefficiency  that  are  so  unfortunately 
characteristic  of  city  governments  at  the  present  day. 

§  122.  Happily  our  people  are  beginning  to  reahze  the 
nature  and  extent  of  these  evils,  and  are  seriously  study- 
Municipai  i^^g  various  remedies  suggested  for  the  un- 
ownership.  fortunate  condition  of  affairs.  Many  writers 
have  favored  municipal  ownership  of  all  natural  mo- 
nopolies; and  this  proposition,  which  ten  or  fifteen  years 
ago  was  considered  rank  socialism,  has  commanded  an 
increasing  amount  of  support.  In  behalf  of  the  plan 
it  is  argued  that,  since  monopoly  is  inevitable  in  these 
industries,  our  only  choice  lies  between  public  and  private 
monopoly,  and  that  the  former  is  far  preferable  to  the 
latter.  Private  monopolies,  it  is  contended,  cannot  be 
allowed  to  go  uncontrolled;  and  the  attempt  to  regulate 
them  arrays  powerful  corporations  against  the  public  in- 
terest, with  results  that  are  disastrous  to  the  virtue  of  city 
officials  and  state  legislatures.  Corruption  and  extor- 
tion, it  is  said,  can  be  remedied  only  by  having  the  ac- 
credited agents  of  all  the  people  manage  these  enterprises 
with  a  single  view  to  the  interests  of  the  pubhc. 

But  the  problem  hardly  admits  of  such  a  simple  solu- 
tion.    Monopoly,    it   must    be    conceded,    is   inevitable; 


iSTATURAL  MONOPOLIES  1 79 

and  our  only  alternatives  are,  admittedly,  public  owner- 
ship or  private  ownership  with  public  control.  But  public 
ownership  presents  serious  difficulties,  chiefly  ^.5  jj^. 
that  of  securing  efficient  and  honest  man-  *^'^"'®3- 
agement.  At  the  present,  from  the  federal  postal  es- 
tablishment down  to  the  small  municipal  printing  office, 
pubHc  management  is  found  to  be  frequently  ineffective, 
and  not  infrequently  dishonest.  Laborers  engaged  on 
public  works  are  likely  to  demand  short  hours  and  the 
highest  pay,  while  working  at  a  pace  that  must  be  ex- 
ceeded by  the  citizen  who  hopes  to  pay  his  annual  tax  bill; 
governments  must  purchase  materials  and  supplies  from 
contractors,  many  of  whom  will  stoop  to  such  bribery  as 
has  been  exposed  in  the  postal  service;  and  the  result  is 
that  the  cost  of  operation  is  often  higher  than  it  would  be 
under  a  private  corporation.  Moreover,  when  a  deficit 
appears  in  a  public  enterprise,  it  is  likely  to  be  viewed 
with  extreme  complacency  by  the  large  number  of  citizens 
who  pay  no  taxes  on  real  or  personal  property,  but  secure 
the  service  for  less  than  cost.  Evidently,  public  owner- 
ship, even  if  it  is  better  than  private,  carries  with  it  very 
grave  difficulties  which  make  it,  at  the  best,  nothing  but 
the  less  of  two  evils. 

Our  cities  have  had  the  most  experience  with  municipal 
waterworks,  which  are  now  more  often  public  than  pri- 
vate, especially  in  the  larger  centers  of  popu-  xhe  lessons 
lation.  The  results  of  public  management  0*  expene-ue 
have  been  better  in  this  case  than  they  would  be  in  the 
lighting  or  transportation  industries,  since  waterworks 
are  simpler  in  operation  and  most  of  the  methods 
and    appliances     have    long    since    passed    out    of    the 


l8o  MONOPOLIES 

experimental  stage.  We  have  had  few  experiments  with 
municipal  gas  plants,  and  the  teachings  of  experience  at 
this  point  are  somewhat  conflicting.  A  larger  number 
of  cities  have  entered  the  electric-lighting  industry,  out 
the  m.ovement  is  too  recent  to  permit  one  to  form  any- 
thing like  a  final  conclusion.  With  street  railways,  pubHc 
management  is  practically  untried,  although  municipal 
ownership  of  subways  which  have  been  leased  to  private 
companies  has  been  adopted  in  New  York,  Boston,  and 
perhaps  other  cities.  In  all  industries  success  or  failure 
has  depended  on  the  character  of  the  local  governments-, 
and,  wherever  the  pohticians  have  been  allowed  to  rob  the 
people,  municipal  ownership  has  proved  anything  but  an 
unmixed  blessing. 

§  123.    Between   the   alternatives   of  public   ownership 

and  private  management  under  public  control,  it  will  be 

wise  for  the  student  to  refrain   from  making 

Conclusions.  ,     ,      .  .  •       r 

any  general  decision;  in  fact,  the  only  safe 
course  is  to  decide  each  case  that  arises  with  reference 
to  its  particular  circumstances.  Municipal  ownership 
of  waterworks  has,  on  the  whole,  justified  itself  by  its 
results;  public  management  of  street  railways  at  a 
time  when  all  the  methods  and  appliances  have  not 
yet  passed  out  of  the  experimental  stage  would  be  far 
more  hazardous.^  In  all  cases  the  probability  of  securing 
honest  and  efficient  management  is  the  factor  to  be  given 
the  chief  weight.  A  reform  of  the  civil  service  by  which 
appointments  to  public  office  can  be  separated  from  poli- 

^  Since  1890  the  method  of  propelling  cars  has  been  revolutionized  by 
electricity,  and  one  form  of  electrical  equipment  after  another  has  come 
into  use. 


NATURAL  MON-QPOUES 


I8l 


tics  is  an  absolutely  indispensable  condition  for  the  fur- 
ther extension  of  municipal  enterprise;  and  in  any  case 
the  ugly  problem  of  bribery  must  be  grappled  with,  since 
this  will  not  be  eliminated  by  the  adoption  of  public  man- 
agement. During  the  past  decade  American  cities  have 
made  encouraging  efforts  to  improve  the  management  of 
municipal  affairs,  and  various  states  have  established 
commissions  with  necessary  power  to  control  public  ser- 
vice corporations.  Enough  has  already  been  accom- 
ph'shed  to  justify  the  expectation  that  such  control  will 
become  increasingly  effective.  While,  therefore,  experi- 
ments in  municipal  o^^'nership  may  be  desirable,  effective 
public  control  may  make  unnecessary  the  general  adop- 
tion of  public  ownership. 

§  124.  Besides  the  various  municipal  services  just 
mentioned,  the  railroads,  the  telegraph,  and  the  tele- 
phone industries  possess  the  characteristics  of  other  natural 
natural  monopolies.  The  railroad  problem  ™oiopoi»es. 
is  so  extremely  important  that  it  will  require  treatmenV 
in  a  separate  chapter;  the  telegraph  and  telephone 
industries  cannot  receive  adequate  attention  in  the  space 
at  our  command.  The  events  of  1902  have  brought  into 
prominence  the  fact  that  the  country's  supply  of  anthra- 
cite coal  has  fallen  into  the  hands  of  a  few  railroads  which 
have  acquired  a  substantial  monopoly  of  the  mines.  It  is 
probable  that  from  one  dollar  to  a  dollar  and  fifty  cents  is 
added  by  the  coal  monopoly  to  the  price  of  every  ton  of 
anthracite  coal  consumed  in  the  United  States,  and  some 
of  the  magnates  in  charge  of  the  roads  have  been  so 
destitute  of  humor  as  to  inform  the  country  that  this  con- 
dition of  things  has  been  expressly  ordained  by  diving 


1 82  MOATOPOL/ES 

Providence.  It  is  possible  that  the  extortion  now  prac- 
ticed will  some  day  be  remedied  by  vigorous  treatment  of 
the  railway  problem,  but  at  present  we  find  in  the  anthra- 
cite coal  industry  a  striking  illustration  of  the  importance 
that  natural  monopolies  sometimes  assume. 

IV.  Capitalistic  Monopolies 

§  125.   Not  long  after  the  Civil  War  various  agreements 

were  formed  in  the  distilling  and  some  other  industrieSj 

by  which  producers  undertook  to  hmit  the  out- 
Agreements        •'  ^      _  , 

between  put  and  to  raise  prices.  These  arrangements, 
however,  were  seldom  of  long  duration,  since 
one  or  more  of  the  parties  to  a  compact  would  usually 
break  his  promise  and  increase  his  sales  at  the  expense  of 
those  who  kept  their  word.  Similar  efforts  to  harmonize 
conflicting  interests  and  establish  monopoly  prices  have 
continued  to  the  present  day;  but  generally  mutual 
jealousy  and  suspicion  have  prevented  them  from  being 
very  effective,  even  when  they  have  been  reenforced  by 
the  establishment  of  common  selling  agencies.  Yet  a 
"friendly  agreement"  between  a  few  large  beef  packers 
in  Chicago  and  some  other  cities  has  sufficed  to  build  up 
a  partial  monopoly  of  the  dressed  beef  industry. 

§  126.   The  weakness  of  the  "gentlemen's  agreement" 

led  to  the  establishment  of  a  more  formal  organization 

known  as  a  pool,  by  which  is  meant  an  agree- 

The  pool.  1  •    •  1         1  •  1  1 

ment  to  divide  the  territory  served,  or  the 
business  obtained,  or  the  earnings  of  the  industry.  Pools 
have  been  most  extensively  used  by  the  railways  of  the 
country,  but  such  associations  existed  in  the  steel  rail 
industry  prior  to  1897,  and  have  been  renewed  in  recent 


CAPITALISTIC  MONOPOLIES  183 

years  in  nearly  all  branches  of  the  steel  trade.  They  often 
enable  producers  to  raise  prices  for  a  considerable  period 
of  time/  but  may  be  broken  up  on  account  of  the  same 
weakness  that  is  so  fatal  to  the  informal  agreement.  The 
courts  long  ago  decided  that  pooling  contracts,  since  they 
have  a  tendency  to  restrain  trade  and  are  contrary  to 
pubhc  policy,  cannot  be  legally  enforced;  and  it  is  very 
difficult  to  devise  a  system  of  fines  or  other  penahies  that 
will  prevent  some  members  from  breaking  a  pooling  agree- 
ment when  a  strong  inducement  is  offered  for  doing  so. 

§  127.  A  more  effective  device  was  invented  in  1882 
when  the  Standard  Oil  Trust  was  estabhshed.  In  the 
trust  a  large  number  of  firms  and  corpora-  ^^  ^    ^ 

o  The  trust. 

Tions  which  had  already  been  brought  under 
a  single  control  were  united  under  a  board  of  trustees. 
The  stockholders  in  the  vr.rious  companies  surrendered 
their  stock  to  the  trustees,  and  received  trust  certificates 
for  the  amounts  at  which  their  property  was  valued. 
This  arrangement  placed  effective  control  of  the  different 
enterprises  in  the  hands  of  a  single  board;  and  within  a 
few  years,  the  plan  was  adopted  by  combinations  in  several 
other  industries.  By  1887  this  movement  toward  the 
formation  of  trusts  reached  such  proportions  as  to  create 
considerable  alarm  at  the  spread  of  monopoly,  and  to  call 
forth  a  large  number  of  repressive  statutes.  During  the 
next  five  years  many  states  enacted  antitrust  laws;   and, 

1  In  the  spring  of  1896  a  pool  raised  the  price  of  steel  rails  by  degrees 
from  t\-j  to  525  per  ton  at  Pittsburg;  subsequently  the  price  was  ad- 
vanced to  j!29.  In  1897,  when  the  pool  was  dissolved,  the  price  fell  to 
515,  and  even  lower.  The  United  .States  government  had  been  charged 
5563  per  tun  for  armor  plate  ;  but  after  the  dissolution  of  the  pool.,  one  ol 
the  steel  comoanies  submitted  an  offer  at  a  price  of  J240, 


1 84  MONOPOLIES 

in  1890,  Congress  passed  what  is  known  as  the  Sherman 
Act,  which  prohibits  all  contracts  or  combinations  in  re- 
straint of  interstate  commerce.  Little  was  accomplished 
under  most  of  these  statutes,  but  the  courts  at  length 
decided  that  the  trust  was  an  unlawful  form  of  organiza- 
tion.-' Accordingly  the  trusts  were  ostentatiously  dis- 
solved, and  forthwith  reorganized  in  another  form;  so 
that  they  continued  to  exist,  though  under  another  form. 
§  128.  The  so-called  trusts  of  the  present  day  are  merely 
large  corporations  which  have  issued  their  securities  in 
The  present  Order  to  purchasc  the  companies  which  were  com- 
capitalistic  bined  under  one  organization.  For  some  years 
monopolies,  after  its  enactment  the  Sherman  Act  was  not 
enforced  with  any  degree  of  success  against  industrial 
combinations.  But  under  its  provisions  the  Supreme 
Court  in  1904  dissolved  a  ccmpany  organized  under  the 
laws  of  New  Jersey  to  hold  the  stock  of  certain  railroad 
companies  in  the  Northwest.  Thereafter  various  in- 
dustrial and  commercial  combinations  were  successfully 
attacked,  and  a  vigorous  enforcement  of  the  Sherman 
Act  was  undertaken  against  a  long  list  of  organizations, 
both  large  and  small.  In  191 1  the  Standard  Oil  Com- 
pany and  American  Tobacco  Company  were  finally  dis- 
solved, but  were  allowed  to  reorganize  in  the  form  of  a 
number  of  separate  companies  which  possibly  remain 
practically  under  single  control.  There  is  now  no  doubt 
that  the  Sherman  Act  effectually  restrains  formal  organi- 

'  This  was  decided  in  New  York  on  the  ground  that  when  a  corpora- 
tion surrenders  its  stock  to  trustees,  it  abdicates  control  of  its  business,  an 
action  which  is  %dtra  vires,  that  is,  beyond  the  powers  bestowed  upon  it 
by  its  charter. 


CAPITALISTIC  MONOPOLIES  1 85 

zation  to  monopolize  trade  between  the  states,  but  it  is 
doubted  whether  it  can  compel  producers  to  compete. 
It  is  certain,  however,  that  the  formation  of  trusts  has 
come  to  an  end,  and  that  all  persons  who  by  common 
ownership  of  stock,  price  agreements,  or  otherwise,  com- 
bine to  monopolize  trade  do  so  at  serious  peril. 

However  effective  or  ineffective  the  law  may  have  been, 
prices  have  continued  to  rise,  even  in  the  most  highly 
competitive  industries,  on  account  of  the  depreciation  of 
gold,  the  standard  by  which  the  value  of  all  other  things  is 
measured.  Therefore  the  cost  of  living  has  increased,  and 
there  has  been  a  demand  for  further  action  against  trusts. 

In  1 914  Congress  passed  two  acts  supplementing 
existing  anti-trust  legislation.  The  first  of  these,  a 
supplementary  anti-trust  act,  was  intended  to  Legislation 
strengthen  and  complete  existing  laws  against  °*  ^^^'*- 
monopolies  and  unlawful  restraint  of  interstate  and 
foreign  commerce;  the  second  created  a  Federal  Trade 
Commission  to  serve  as  an  agency  for  carrying  into 
effect  the  policies  of  the  government  directed  toward 
the  suppression  of  trusts. 

These   laws   declared   unlawful    "unfair   methods   of 
competition  in  commerce."     They  do  not  define  "unfair" 
competition  and  it  would  have  probably  been  ^^^^^ 
extremely  difficult,  if  not  impossible,  to  do  so.   competition, 

^  '      _      ^  price  dis- 

The  enforcement  of    the  acts  is  intrusted  to  crimina- 
the    Federal    Trade    Commission,    which    is  restrictive 
authorized  to  investigate  cases  of  unfair  com- 
petition and   to  issue  orders  requiring  the  discontinu- 
ance thereof.     Any  defendant  in  such  proceedings  may 
appeal    to   the  courts  against   the  orders  of   the   Com- 


1 86  MONOPOLIES 

mission.  Since  the  offense  was  a  new  one,  created  by  this 
law,  and  also  one  incapable  of  exact  definition,  Congress 
acted  wisely  in  refraining  from  placing  the  enforcement  of 
the  law  in  the  hands  of  the  courts  and  inflicting  penalties 
upon  first  offenders.  Another  important  provision  of 
the  law  was  the  prohibition  of  price  discrimination 
between  different  purchasers  in  different  sections  of  the 
country,  when  the  effect  of  such  discrimination  is  sub- 
stantially to  eliminate  competition  and  create  a  mo- 
nopoly. This  aimed  at  a  practice  of  many  of  the  trusts, 
and  was  designed  to  protect  small  competitors  against 
a  form  of  attack  which  it  is  difficult  for  them  to  meet. 
Another  provision  related  to  restrictive  sales  and  leases. 
This  declares  it  illegal  to  sell  or  lease  goods  on  the  condi- 
tion or  understanding  that  a  purchaser  or  lessee  shall  not 
buy  or  lease  similar  goods  from  others,  whenever  the 
effect  of  such  restrictions  is  specifically  to  lessen  compe- 
tition or  create  a  monopoly. 

The  Federal  Trade  Commission,  appointed  by  the 
President,  was  given  power  to  investigate  corporations 
The  Federal  engaged  in  interstate  or  foreign  commerce, 
Commis-  cxccpt  common  carriers  and  banks,  to  demand 
^'°°"  access  to  books,  records,  and  papers,  to  sum- 

mon witnesses,  and  to  require  annual  or  special  reports. 
The  Commission  is  also  required  to  aid  other  govern- 
mental agencies  in  enforcing  the  anti-trust  law.  It  took 
the  place  of  the  Bureau  of  Corporations,  created  under 
earlier  acts,  which  had  made  many  investigations  of 
the  trust  problem,  but  had  not  been  clothed  with  powers 
so  broad  and  drastic  as  those  intrusted  to  the  new 
Commission. 


CAPITALISTIC  MONOPOLIES  1 8/ 

§  129.    Trusts    have    found    numerous    apologists    or 
active  advocates,  who  have  argued  that  modern  com- 
binations are  merely  the  latest  and  most  elS-  Arguments 
cient  method  of  organizing  capital,  and  the  combi^a°^ 
highest  product  of  industrial  evolution.     The  *^°°^ 
principal  basis  for  such  claims  consists  of  certain  econ- 
omies which,  it  is  alleged,  can  be  realized  by  the  combina- 
tion of  all  the  companies  engaged  in  an  industry.     The 
savings  attributed  to  the  formation  of  trusts  may  be 
divided  into  two  classes :    those  supposed  to  be  effected 
in  the  process  of  production,  and  those  reaHzed  in  the 
marketing  of  products. 

Of  the  first  class,  the  alleged  economies  are  due  to  the 
advantages  of  production  on  a  large  scale.  At  this  point 
the  advocate  of  the  trust  usually  contrasts  Alleged 
small-scale  production  witli  a  combination  of  fn°p^o™'^^ 
all  competing  plants,  and  argues  that  de-  <i"ction. 
cided  superiority  hcs  with  the  latter.  But  this  is  very 
wide  of  the  mark,  since  the  real  question  is  whether 
the  trust  is  superior  to  the  very  large  concerns  which 
it  unites  —  whether,  for  instance,  the  United  States 
Steel  Corporation  is  a  more  efficient  producer  than 
the  Carnegie  Company,  which  it  absorbed,  or  than  the 
Lackawanna  Company,  which  has  entered'  the  indus- 
try as  a  competitor  with  a  capital  of  some  840,000,000. 
One  of  the  outstanding  facts  of  the  recent  history 
of  the  steel  industry  is  the  continued  growth  of  inde- 
pendent steel  companies,  which  recently  ha\e  organized 
an  export  company  to  handle  their  foreign  trade.  The 
largest  of  the  so-callwl  trusts,  therefore,  seems  to  have 
no  monopoly   of    efficiency.     Wlien    the   matter   is  ex- 


1 88  MONOPOLIES 

amined  m  this  way,  and  confusion  of  large-scale  production 
with  monopoly  is  avoided,  the  argument  in  favor  of  the 
trust  does  not  appear  to  be  very  strong.  Experience 
seems  to  show  that  in  manufacturing  industry  there  are 
limits  beyond  which  an  increase  in  the  size  of  a  company 
will  not  reduce  the  cost  of  production,  and  that  this  point 
is  reached  long  before  a  single  concern  becomes  large 
enough  to  monopolize  the  whole  field.  In  practically 
every  industry  that  has  been  dominated  by  a  trust,  in- 
dependent concerns  have  continually  made  their  appear- 
ance, and  have  competed  so  effectively  that  they  have  been 
crushed,  if  at  all,  only  by  foul  means. 

When,  however,   we  turn  to  the   work   of  marketing 

products,  the  case  in  fa\'or  of  combination  is  not  so  weak. 

A   monopoly   can   avoid   some   of  the  outlay 

Economies  ^  ,  .  ,  .   . 

in  marketing  which  Competing  firms  incur  for  advertismg 
^^  and    traveling    salesmen,    while    occasionally 

something  can  be  saved  in  freight  rates  by  sending  every 
order  to  be  filled  at  the  mill  that  is  nearest  to  the  consumer. 
But  it  must  not  be  forgotten  that  a  large  amount  of  adver- 
tising is  necessary  in  order  to  stimulate  the  demand  for 
certain  products,  and  that  some  trusts  that  originally 
made  deep  cuts  in  their  advertising  expenses  found  that 
the  demand  declined  so  rapidly  that  a  more  liberal  policy 
was  necessary.  Then,  too,  a  factory  that  is  content  to 
supply  its  natural  territory  and  not  ambitious  to  control 
all  markets,  however  distant,  does  not  need  to  make  such 
excessive  expenditures  in  pushing  its  sales.  And  finally 
the  freight  rates  saved  by  avoiding  cross- shipments  are 
not  a  large  factor  in  the  case  of  products  which  are  not  of 
a  bulky  character;   while,  with  bulky  goods,  production 


CAPITALISTIC  MONOPOLIES  189 

J3  usually  pretty  well  localized  in  the  vicinity  of  the 
principal  consumers  before  combinations  are  formed,  so 
that  there  is  generally  httle  room  for  s^'ing  in  cross 
freights.  While  it  must  be  conceded  that  a  monopoly 
may  be  able  to  effect  some  savings  in  marketing  its  prod- 
ucts, it  is  certain  that  the  economies  thus  attained  have 
been  greatly  exaggerated. 

More  than  twenty  different  economies  are  said  to  be 
attained  by  combinations,  and  the  list  is  so  formidable 
as  to  raise  the  question  how,  if  the  facts  are 

P^  '  The  persist- 

as  alleged,  an  independent  concern  can  have  enceofcom- 

the  faintest  prospect  of  success.  Now  the 
fact  is  that  new  competitors  generally  arise  shortly  after 
a  trust  is  formed,  and  that  competition  with  the  combina- 
tions has  steadily  increased.^  It  is  evident  that  the  busi- 
ness world  has  not  accepted  the  argument  that  the  trust 
is  more  efficient  than  an  independent  concern  of  large 
size,  but  has  proceeded  upon  the  opposite  theory.  For 
the  present,  therefore,  the  student  will  do  well  to  entertain 
a  profound  skepticism  concerning  the  net  advantages  of 
the  trust. 

A  consideration  that  generally  escapes  notice  is  the 
fact  that   large   combinations   are  subjected  to  constant 

'  Advocates  of  the  trusts  usually  enter  a  demurrer  here,  and  say  that 
this  proves  nothing,  since  the  new  companies  are  organized  for  the  purpose 
of  selling  out  to  the  trusts  at  high  prices.  The  point  is  not  well  taken, 
however,  for  no  intelligent  corporation  manager,  possessing  a  plant  that 
could  produce  a  commodity  more  cheai>ly  than  any  possible  competitor, 
would  long  continue  to  buy  out  inferior  estahlishincnts  that  could  not  hope 
to  live  in  the  face  of  fair  competition.  A  new  and  superior  agent  of  jno- 
duction,  like  the  power  loom,  can  be  set  to  work  without  buying  u[>  all  the 
hand  looms;  and  this  W(juld  be  true  of  the  trust  if  it  were  the  most  effec- 
tive method  of  organizing  production. 


190  MONOPOLIES 

expenses  from  which  the   independent  concern   may  be 
comparatively  free.     The  ablest  legal  talent  must  be  em- 
ployed at  great  expense  to  devise  methods  of 

Disadvan-  ^     •'  ... 

tagesofa        circumvcnting  inconvenient  statutes;  an  expen- 

combination.        .  .       .  .  i     i  •  i 

sive  secret  service  is  sometimes  needed  in  order 
to  spy  out  the  affairs  of  competitors  by  methods  that 
involve  considerable  wear  and  tear  upon  the  self-respect 
of  both  principal  and  agent;  large  contributions  must 
be  made  to  the  campaign  funds  of  one  or  both  pohtical 
parties,  since  the  politicians  must  be  concihated  at  all 
hazards;  while  enormous  sums  must  be  constantly  in- 
vested in  suppressing  competitors,  and  giving  a  proper 
warning  to  prospective  interlopers.  It  will  be  observed 
that  we  here  assume  that  the  company  never  stoops  to 
actual  bribery  or  makes  large  legislative  expenditures 
which  have  to  be  charged  up  to  the  construction  account. 
When,  indeed,  all  factors  are  taken  into  consideration,  it 
seems  doubtful  whether  one  should  speak  of  the  net  saving? 
or  the  net  wastes  that  result  from  combination. 

§  130.  The  whole  ground  covered  by  the  debate  con- 
cerning the  advantages  of  the  trust  is  too  large  for  us 
The  alleged  tc  examine  it  in  all  details,  but  it  should 
characterof  ^^  remarked  that  the  argument  in  favor  of 
competition,  combination  usually  begins  with  the  propo- 
sition that  competition  is  not  only  a  wasteful  but  a 
destructive  process.  Combination  is  represented  as 
the  natural  refuge  for  competing  concerns  that  have  been 
wasting  their  substance  in  a  life-and-death  struggle  for 
survival;  and,  in  particular,  it  is  alleged  that  hard  times, 
which  destroy  profits,  are  the  real  parents  of  the  trust 
HQOvement.    The  claim  is  disproved  by  the  simple  fact 


CAPITALISTIC  MONOPOLIES  1 91 

that  trusts  are  formed,  not  in  times  when  business  is 
depressed,  but  in  periods  of  prosperity.  In  1893,  the 
year  of  the  last  serious  panic,  new  combinations  were 
formed  with  a  capitahzation  of  $239,000,000.  The  follow- 
ing year,  when  the  prostration  of  industry  was  complete, 
the  capitalization  of  organized  trusts  was  only  $30,400,000; 
and  the  movement  continued  to  show  small  proportions 
until  1898,  when  prosperity  had  fully  returned.  In 
that  year  the  newly  organized  trusts  had  a  capital  of 
$708,000,000;  in  1*899  the  figures  rose  to  $2,243,000,000; 
and  in  1900  stood  at  $831,000,000.  \fter  1902,  when 
conditions  in  the  stock  market  became  unfavorable,  it 
proved  difficult  to  carry  through  any  sort  of  scheme  for 
securing  the  ''economies  of  combination";  not  adversity, 
then,  but  prosperity  seems  to  be  the  condition  favorable 
to  the  growth  of  trusts. 

§  131.   This  brings  us  to  a  more  important  considera- 
tion.    The  combinations  formed  between  1897  and  1902 
were  organized  not  for  the  purpose  of  realizing 
economies  in  manufacturing  commodities,  but  for  trust  move- 

.  ment  in  the 

the  profits  to  be  derived  from  marketing  stocks,  united 
The  return  of  prosperity  sent  investors  into  the 
stock  market  in  search  for  securities  in  which  to  invest 
the  profits  drawn  from  their  business  enterprises.  Under 
this  demand  stocks  rose  to  high  prices  and  a  speculative 
fever  was  induced  which  broke  all  restraint  and  carried 
prices  up  to  still  higher  figures.  This  was  the  opportunity 
for  the  promoter  of  companies,  and  he  was  not  slow  to 
seize  it.  The  country  needed  few  new  railroads,  and  the 
best  thing  to  operate  in  was  the  staple  branches  of  manu- 
facturing  industry.      Options   were   secured    upon    large 


192  MONOPOLIES 

numbers  of  plants,  good,  bad,  and  indifferent;  extrava- 
gant prices  were  offered,  payment  being  made  more  often 
with  securities  than  with  money;  and  the  stocks  or 
bonds  of  the  newly  formed  combinations  were  offered 
to  investors,  who  greedily  seized  the  bait.  This  pro- 
cess continued  as  long  as  the  pubhc  would  purchase  the 
securities,  and  it  came  to  a  close  when,  in  1902,  the  in- 
vestor concluded  that  he  had  had  enough  and  abandoned 
Wall  Street.  The  economies  of  combination  .  figured 
largely  in  the  prospectuses  of  the  new  companies,  but 
they  had  little  or  nothing  to  do  with  the  entire  movement. 

The  ordinary  method  of  capitalizing  a  trust  was  to 
issue  preferred  stock  or  bonds  in  order  to  pay  for  the 
Overcapitaii-  plants,  and  then  to  print  as  much  common 
•zation.  stock   as   there   was   any   prospect   of   selhng 

to  the  public.  Thus  the  common  stock  has  almost  invari- 
ably represented  nothing  but  water;  while  the  preferred 
stock,  issued  to  pay  for  factories  bought  at  exorbitant 
prices,  has  usually  exceeded  a  conservative  valuation  of 
the  property  owned  by  the  trust.  The  result  has  been 
what  one  might  have  expected;  some  of  the  trusts  have 
not  disappointed  the  persons  who  bought  their  bonds 
or  preferred  shares,  and  have  even  managed  to  pay  some- 
thing on  their  common  stock;  but  the  majority  have 
shown  much  less  favorable  results,  and  have  caused 
serious  losses  to  investors. 

§  132.  But  the  profits  derived  from  floating  companies 
are  not  the  only  cause  of  the  formation  of  in- 

Special  privi-  _  _        _ 

lege  a  cause     dustrial  combinations^  and  do  not  account  foi 

the  success  which  some  of  them  have  attained. 

Patents  have   been   a   factor   of   some   importance,  the 


CAPITALISTIC  MONOPOLIES 


193 


production  of  certain  products,  such  as  cigarettes,  barbed 
wire,  and  wire  fencing,  having  been  controlled  for  a  time 
by  reason  of  the  ownership  of  all  the  available  patents. 
Discriminating  railway  rates  have  had  a  vast  influence 
in  fostering  monopoly,^  and  it  is  probable  that  some  of 
the  largest  trusts  still  enjoy  more  favorable  terms  than 
their  competitors.  Then,  too,  elements  of  natural  mon- 
opoly can  be  discovered  in  many  of  the  combinations. 
The  Standard  Oil  Company  has  profited  greatly  through 
its  control  of  pipe  hnes,^  the  United  States  Steel  Corpora- 
tion owns  a  large  part  of  the  supplies  of  Bessemer  ore  in 
the  United  States,  and  in  the  copper  industry  the  effort 
has  been  made  to  secure  control  of  all  the  principal  mines. 
It  seems  probable,  in  fact,  that  whatever  tendency  toward 
monopoly  may  have  existed  in  manufacturing  industry 
has  been  due  to  the  causes  here  mentioned  rather  than  to 
any  economy  derived  from  replacing  large-scale  produc- 
tion by  monopoly. 

§  133.   Some  of  the  responsibihty  for  the  formation  of 
trusts    and    particularly    for    the    extortion    which    they 
have  sometimes  practiced  must  be  laid  at  the  xhe  influence 
door  of    our  protective  tariff,  which   imposes  o^thetanff. 
heavy  duties   upon    imported    goods    that    might   other- 

'  The  early  growth  of  the  Standard  Oil  Company  is  attributable  chiefly 
to  this  factor;  and,  despite  denials,  it  seems  clear  that  rates  are  still 
adjusted  so  as  to  favor  the  points  where  this  concern's  refineries  are  estab- 
lished. In  most  cases  proof  of  the  existence  of  this  evil  is  hard  to  obtain, 
but  it  can  be  adtjuced  in  the  case  of  the  l)eef  trust  and  some  others. 

'^  Hy  controlling  the  pipe  lines  the  Standard  Oil  interests  can  oblige  in« 
dependent  companies  to  pay  sixty  cents  a  barrel  for  service  which  costs  but 
ten  or  twelve  cents  to  provide;  and  it  has  here  an  advantage  of  about  on« 
cent  a  gallon  on  oil  exported  from  the  country. 


1 94  MONOPOLIES 

wise  compete  with  the  products  of  the  trusts.  It  was 
the  original  theory  of  protection  that,  although  foreign 
competition  might  be  prevented  by  means  of  a  high  duty, 
competition  among  domestic  producers  would  insure  fair 
prices  to  consumers.  The  situation  is  radically  altered, 
however,  when  foreign  competition  is  excluded  by  tariff 
regulations  of  the  government,  ancj  then  the  home 
manufacturers  unite  to  raise  prices  under  the  shelter 
afforded  by  the  tariff.  In  1904,  for  instance,  American 
railways  were  compelled  to  pay  $28  per  ton  for  steel 
rails  delivered  at  Pittsburg,  while  they  transported  to 
Canada  similar  goods  for  which  the  Canadians  were 
charged  $20  per  ton.  This  sort  of  thing  is  common 
in  the  iron  and  steel  industry,  and  occurs  frequently 
enough  elsewhere.  Some  few  of  the  trusts,  such  as  the 
sugar  combination,  have  been  formed  largely  because 
of  conditions  created  by  the  tariff;  and  the  power  which 
most  of  the  others  have  possessed  over  prices  has  been 
greatly  increased  by  reason  of  the  tariff  duty.  To  this 
it  is  sometimes  replied  that  the  Standard  Oil  Company 
originated  in  an  industry  that  was  not  dependent  on  the 
tariff,  and  that  trusts  exist  in  England  under  iVee  trade. 
Neither  consideration  is  relevant,  however,  for  no  one 
imagines  that  all  trusts  are  due  to  the  tariff;  while  it  is  a 
well-known  fact  that  in  England  few  combinations  exist 
enjoying  any  such  control  as  American  trusts  possess  ever 
their  industries,  and  that  no  English  trust  can  levy  a  tribute 
of  a  single  penny  on  account  of  the  action  of  the  govern- 
ment in  excluding  foreign  competitors.  The  simple 
fact  is  that  the  tariff  called  a  few  trusts  into  being,  and 
enables  most  of  the  others  to  raise  prices  higher  than 


CAPITALISTIC  MONOPOLIES  j^^ 

would  be  possible  if  competition  prevailed  at  home  oi 
relief  could  be  secured  through  foreign  sources  of  supply. 
A  reform  of  the  tariff  would  not  settle  all  problems  con- 
nected with  trusts,  but  it  would  curtail  their  power  of 
plundering   the   pubhc. 

§  134.  It  is  sometimes  alleged,  indeed,  that  the  trusts 
do  not  raise  the  prices  charged  consumers,  and  statistics 
are  produced  in  support  of  this  contention.  Trusts  and 
The  admirers  of  the  Standard  Oil  Company,  p"*^^^- 
in  particular,  have  insisted  that  this  concern  is  responsible 
for  the  reduction  in  the  price  of  refined  export  oil,  which 
fell  from  thirty  cents  in  1870  to  about  six  cents  in  1898; 
and  many  people  are  inclined  to  the  belief  that  this  trust 
has  actually  cheapened  oil.  But  such  statistics  do  not 
show  the  margin  or  difference  between  the  price  of  crude 
oil,  which  the  Standard  buys  from  the  wells,  and  the 
refined  product ;  and,  clearly  enough,  it  is  only  by  observ- 
ing what  this  margin  has  been  that  one  can  judge  of  the 
efifect  of  the  monopoly  upon  prices.  In  1870  the  differ- 
ence between  the  price  of  crude  oil  and  that  of  refined 
ranged  from  fifteen  to  twenty  cents,  and  by  the  close  of 
1879  competition  between  the  Standard  Oil  Company 
and  various  rivals  had  reduced  it  to  between  five  and 
six  cents.  In  1882,  when  the  trust  was  finally  formed, 
the  margin  was  seldom  as  high  as  six  cents;  and  from 
that  day  to  the  present  it  has  never  fallen,  except  tempo- 
rarily, under  the  influence  of  competition;  but  whenever 
the  disappearance  of  competitors  or  the  necessities  of 
the  consumers  would  permit,  the  margin  has  increased. 
The  decline  in  the  margin  between  crude  and  refined 
oil  was  brought  about,  therefore,  prior   to  1882,  by  the 


196  MONOPOL/ES 

influence  of  competition;  since  that  year  monopoly  has 
checked  the  movement.  Moreover,  the  export  prices 
do  not  show  what  domestic  consumers  pay  for  their  oil. 
In  1901  the  Industrial  Commission  found  that  in  regions 
where  competition  was  met  from  local  refiners,  the  Stand- 
ard Oil  Company  sold  oil  for  as  little  as  5.5  cents;  while 
in  places  where  competition  did  not  exist,  the  consumers 
paid  as  much  as  twenty  or  twenty-five  cents.  These 
discrepancies  cannot  be  explained  by  differences  in  the 
cost  of  transportation,  since  the  freight  rates  account  foi 
but  a  fraction  of  the  inequalities ;  the  fact  is  that  wherever 
local  refiners  can  get  oil  and  compete  with  the  trust,  prices 
are  low,  and  that  wherever  competition  is  absent,  extor- 
tionate rates  are  charged.  Most  other  trusts  make  a 
similar  showing,  when  the  prices  of  their  finished  products 
are  compared  with  the  prices  of  the  principal  raw  materials, 
and  it  is  only  from  competition  that  consumers  can  expect 
relief. 

§  135.  When  discussion  of  remedies  for  the  evils  of 
trusts  began,  the  thing  most  often  recommended  was 
Pro  osed  publicity.  It  was  argued  that,  if  trusts  were 
remedies:  compelled  to  disclosc  the  facts  about  their 
ici  y.  Qa^pjj;a^iJ2ation,  earnings,  and  price  pohcies,  it 
would  be  possible  to  secure  information  that  would  enable 
us  to  devise  a  sovereign  remedy.  PubHcity  is  greatly 
to  be  desired,  but  it  happened  to  be  the  favorite  remedy 
of  those  who  believed  trusts  to  be,  upon  the  whole,  a  good 
thing  for  the  country,  and  it  was  often  presented  as  an 
alternative  to  doing  something  to  remedy  evils  already 
known  to  exist.  It  was  known,  for  instance,  that  the 
tariff  was  one  of  the  conditions  that  led  to  the  formation 


CAPITALISTIC  MONOPOLIES 


197 


of  certain  trusts,  but  many  persons  appeared  to  prefer 
publicity  to  a  reform  of  the  tariff,  and  even  argued  that 
the  tariff  had  nothing  to  do  with  the  trust  problems. 
In  1903  the  federal  government  established  the  Bureau 
of  Corporations,  which  has  undertaken  a  thorough  study 
of  the  trusts.  The  result  of  its  investigations  has  been 
to  show  conclusively  the  need  of  action,  and  that  in  direc- 
tions not  approved  by  many  of  the  advocates  of  pub- 
licity. The  investigations  of  the  Bureau  and  the  court 
proceedings  in  suits  brought  to  dissolve  illegal  combina- 
tions have  merely  demonstrated  the  existence  of  the  evils 
of  which  complaint  was  originally  made,  and  have  not 
disclosed  the  benefits  about  which  so  much  was  said 
fifteen  or  twenty  years  ago.  Publicity  will  always  be 
necessary,  but  it  is  a  poor  substitute  for  action. 

More  is  to  be  expected  from  a  serious  effort  to  grapple 
with  the  evil  of  discriminating  freight  rates.  This  subject 
will  receive  further  consideration  m  the  fol-  (2)  Abolition 
lowing  chapter;  for  the  present  it  is  enough  diswimlna- 
to  say  that  a  number  of  trusts  probably  receive  **°'^- 
favors  from  the  railroads,  and  are  thereby  given  a  material 
advantage  over  possible  competitors.  Until  all  persons 
receive  the  same  treatment  from  transportation  agencies, 
a  free  field  for  competition  cannot  exist. 

Another  remedy  for  a  part  of  the  extortion  practiced 
by  trusts  is  to  reduce  or  remove  the  tariff  duties  imposed 
upon  monopolized  products.  This  is  a  pro-  (3)  Reform 
Dosal  which,  naturally  enough,  has  been  slow  0' ^^^^e  tanff. 
in  gaining  the  sujjport  of  protectionists.  It  is  said  that 
removal  of  duties  would  destroy  not  only  the  trust,  but 
the  industry;  yet  this  is  no  excuse  for  refusing  to  cut  down 


1 98 


MONOPOLIES 


t.he  duty  to  the  lowest  possible  limits.  In  the  case  of 
most  of  the  important  trusts,  it  is  tolerably  certain  that 
the  complete  removal  of  the  duty  would  have  no  effect 
except  to  destroy  their  power  to  plunder  the  pubHc.  And 
it  is  certain  that  this  is  the  remedy  that  trust  magnates 
most  fear;  they  are  willing  that  people  should  discuss  to 
the  full  the  advantages  of  pubHcity,  provided  that  nothing 
is  done  with  the  favors  accorded  by  our  present  tariff. 

It  has  been  proposed,  also,  to  declare  unlawful  some 

of  the  tactics  now  employed  by  certain  trusts  in  order 

to  intimidate  competitors.     Whenever  an  inde- 

(4)  Preven-  ^  _ 

tion  of  unfair   pendent  oil  refinery  is  built,  the  price  of  oil  in 

competition.       ,  ,        ,.        .  i  i    i  1 

that  locahty  is  at  once  reduced  by  the  trust 
to  unprofitable  figures;  and  such  action  frequently  bank- 
rupts the  newcomer.  Other  combinations  have  refused 
to  sell  their  goods  to  dealers  who  patronized  competing 
companies,  or  have  sold  only  on  terms  that  could  leave 
the  wholesalers  or  retailers  no  profit.  In  these  and  other 
ways  systematic  intimidation  has  been  practiced,  and 
any  one  who  contemplates  entering  an  industry  controlled 
by  a  trust  must  expect  to  meet  this  sort  of  competition. 
The  remedy  proposed  is  to  apply  to  the  large  corporations 
of  the  present  day  the  same  principles  of  law  which  have 
long  been  applied  to  common  carriers  and  some  other 
occupations,  viz.y  to  declare  that  such  an  enterprise  is 
affected  with  a  public  interest  and  must  sell  to  all  upon 
equal  terms.  Such  a  requirement  would  make  it  impos- 
sible for  a  trust  to  reduce  the  price  in  one  locahty  in  order 
to  kill  competition,  while  maintaining  it  at  high  figures 
elsewhere;  if  enforced,  it  would  encourage  competition 
and  make  it  difficult  to  maintain  a  monopoly.     Some 


CAPITALISTIC  MONOPOLIES  199 

.hing  of  the  sort  may  yet  have  to  be  attempted ;  but  until 
we  learn  how  to  obHge  our  railroads  to  accord  equal  treat- 
ment to  all  shippers,  it  is  doubtful  whether  much  could 
be  accomphshed  by  attempting  to  bring  other  industries 
under  the  laws  applicable  to  public  callings. 

A.  reform  of  the  state  corporation  laws,  by  which  specu- 
lative promoting  should  be  restricted,  the  power  of 
corporations  more  carefully  hmited,  and  responsible  man- 
agement in  the  interest  of  stockholders  assured, 

o  _  _  _  (5)  Reform  of 

is  one  of  the  chief  desiderata;    it  is  also  the  state corpora- 

, .  --       ,  .  „  -      ,        tion  laws. 

thing  most  difficult  to  attain,  bome  of  the 
states  are  ready  to  impose  upon  corporations  all  needful 
restrictions,  but  others  will  undertake  nothing  of  the  sort, 
preferring  rather  to  encourage  the  incorporation  of  all 
kinds  of  companies  under  their  lax  laws  for  the  sake  of 
the  large  fees  that  can  be  obtained  in  this  manner.  In 
time  the  evil  results  of  having  forty-five  different  kinds  of 
corporation  law  in  the  United  States,  and  the  fact  that 
a  sort  of  Grcsham's  law  sends  corporations  to  the  states 
where  the  standards  are  lowest,  may  lead  our  people  to 
demand  uniform  and  safe  legislation;  but  there  is  no 
prospect  of  such  a  result  being  attained  in  the  near  future. 
In  view  of  this  fact,  it  has  been  proposed  that  Congress 
should  establish  a  federal  corporation  law  for  companies 
•ngaged  in  interstate  business.  Generally  a  federal 
£  has  been  recommended  that  incorporation  corporation 

law. 

mder  this  law  should  h>c  voluntary;    but  the 

Jnited  States  would  have  the  power,  by  various  indirect 

Lieans,^  to  compel  every  concern  that  desired  to  engage 

1  It  miKht,  for  instance,  levy  a  tax  of  ten  per  cent  on  the  gross 
receipts  of  all  state  corporations  ct-rryin;;  on  interstate  commerce.  This 
"Titilfl  hr  Kimilar  to  th*  ':ax  nnw  /Pvi.'sd  on  the  notes  of  state  hanlia 


200  MONOPOLIES 

in  interstate  business  to  take  out  a  federal  charter.  The 
principal  objection  to  this  proposal  is  that  it  would  transfer 
to  national  control  a  large  share  of  the  whole  business 
of  the  country  which  has  been  subject  heretofore  to  state 
authority,  so  that  it  would  be  a  formidable  step  toward 
centralization.  But,  in  reply,  it  may  be  said  that  it  would 
affect  only  business  that  is  already  national  in  character 
and  cannot  be  controlled  adequately  by  the  laws  of  the 
several  states.  It  is  certainly  an  anomalous  condition 
of  things  in  which  three  or  four  states  create,  under  laws 
that  permit  or  even  invite  fraud,  companies  that  under- 
take to  operate  over  an  entire  continent;  nothing  like  it 
is  tolerated  in  any  other  country.  The  climax  of  absurd- 
ity is  reached  in  the  case  of  the  "tramp"  corporation, 
which  is  forbidden  to  operate  in  the  commonwealth  that 
charters  it,  and  is  given  a  roving  commission  to  prey  upon 
the  people  of  other  states.  The  business  of  the  large 
corporations  is  already  national  in  character  and  extent, 
and  should  be  regulated  by  uniform  and  safe  laws.  If 
the  states  do  not  remedy  the  evils  now  caused  by  their 
own  negligence,  it  is  probable  that  the  aid  of  the  national 
government   will   ultimately   be   invoked. 

§  136.   The  trust  problem  presents  many  diverse  fea- 
tures which  will  not  allow  us  to  reduce  our  analysis  to  a 
single    formula;    for   many  things   have   con- 

Conclusions.  .  j  ^ 

tributed  to  the  movement  toward  monopoly 
in  recent  years,  and  no  single  remedy  will  meet  all  the 
requirements  of  the  situation.  After  considerable  delay 
and  great  inconvenience,  some  of  the  evils  caused  by  the 
trusts  seem  to  be  settling  themselves.  Speculative  pro- 
motion has  been  brought  to  an  end,  at  least  temporarily, 


CAPITALISTIC  MONOPOLIES  20 1 

by  the  refusal  of  the  pubHc  to  buy  shares  of  bubble  com- 
panies; high  prices  have  attracted  large  amounts  of 
capital  into  several  industries,  notably  that  of  iron  and 
steel;  and  competition  is  beginning  to  afford  some  relief 
to  consumers.  The  few  men  who  imagined,  only  a  few 
years  ago,  that  it  would  be  possible  to  bring  all  staple 
branches  of  manufactures  under  their  control  are  learn- 
ing that  it  is  not  an  easy  matter  to  stifle  competition. 
Except  when  based  upon  a  natural  monopoly  of  minerals 
and  other  materials,  or  in  cases  where  transportation 
facilities  can  be  controlled  to  their  advantage,  it  is  probable 
that  the  power  of  trusts  will  steadily  decline,  and  that  an 
increasing  proportion  of  the  growing  business  of  the  coun- 
try will  fall  to  their  rivals.  Already  one  hears  less  about  the 
economies  or  other  beauties  of  consolidation,  and  more 
about  the  weaknesses  of  mammoth  combinations  or  the 
persistent  force  of  competition.  Monopoly  has  never 
been  an  agreeable  thing  for  its  victims,  and  a  free  people 
will  not  permanently  tolerate  it. 

FOR   SUPPLEMENTARY   STUDY 

General:  Hadlky,  Economics,  151-179;  Marshall,  Economics, 
537-553;  Seager,  Introduction  to  Economics,  188-204,  434- 
459,  476-509;  Taussig,  Principles  of  Economics^  II,  397-442. 

Special :  Clark,  The  Problem  of  Monopoly ;  Ely,  Monopolies  and 
Trusts;  Jenks,  The  Trust  Problem;  Meade,  Trust  Finance. 

QUESTIONS 

1.  What,  if  anything,  have  you  observed  or  learned  concern- 
ing government  ownershif)  of  industry  since  1916? 

2.  How  far  has  competition  tended  to  limit   the  growth  of 
monopolies  in  the  United  States  in  recent  years? 


CHAPTER  X 

RAILROAD  TRANSPORTATION 

I.  Railroad  Competition  and  Combination 

§  137.   Railway    construction    began    in    the    United 

States  in  1828,  when  work  was  commenced  on  the  first 

section  of  the  Baltimore  and  Ohio  Railroad. 

The  construc- 
tion of  rail-      By  1840  there  were  2755  miles  of  road  in  the 

country,  practically  all  in  the  Atlantic  states 

and  consisting  of  short  independent  lines  radiating  from 

Boston,  New  York,  Philadelphia,  Baltimore,  Richmond, 

and  Charleston.-^     During  the  next  decade  railroads  were 

extended  with  considerable  rapidity,  and  the  movement 

became  even  more  rapid  after  1850,  so  that  by  i860  the 

railway  mileage  of  the  country  had  increased  to  28,010 

miles  and  the  interior  of  the  Mississippi  Valley  had  been 

connected  with  the  Atlantic  seaboard.     Although  checked 

by  the  Civil  War,   railroad  building  was  recommenced 

after  1866  on  a  larger  scale  than  ever  before,  and,  with 

the  aid  of  the  national  government,  the  first  line  was 

pushed  through  to  the  Pacific  coast.   In  1873  the  country 

had  68,484  miles  of  iron  roads;    but  since  then  many 

additional  lines  have  been  built,  so  that,  in  1904,  no  less 

than  209,000  miles  were  in  operation.     Of  late,  however, 

1  See  Johnson's  American   Railway  Transportation   and   Scribner's 
Statistical  Atlas  for  maps  showing  railroad  construction  by  decades, 

202 


RAILROAD   COMPETITION  AND   COMBINATION    203 

the  rate  of  growth  has  decreased,  and  the  new  construction 
has  been  confined  very  largely  to  piecing  out  existing 
systems,  laying  double  tracks,  oj  building  short  branches. 
With  the  present  needs  of  the  country  tolerably  well  sup- 
phed,  our  mileage  is  nearly  ten  per  cent  greater  than  that 
of  all  Europe,  and  equals  about  two  fifths  of  the  total  for 
the  entire  world. 

§  138.  The  early  railways  were  built,  much  as  trolley 
lines  have  been  during  the  last  decade,  as  local  roads  and 
chiefly  by  local  enterprise.  The  scantiest  character  of 
provision  was  made  for  through  traffic,  and  ^^""'^  ^o^^^. 
it  was  necessary  for  a  long  time  to  transship  freight 
at  each  terminal  point  where  it  passed  to  another  line 
of  road  ;  while  passengers  were  obliged  to  change  cars 
with  equal  frequency.  Between  such  cities  as  Albany 
and  Buffalo,  for  instance,  there  were  originally  as  many 
as  ten  or  eleven  different  roads,  each  run  in  its  own  way 
and  handling  through  traffic  by  the  most  complicated 
and  embarrassing  methods. 

In  time,  connecting  lines  were  obliged  to  cooperate 
with  each  other  for  the  purpose  of  interchanging  business, 
agreements  were  effected  by  which  through     „    .    . 

°  y  o  Beginning 

trains  could  be  run  and  fast-freight  lines  were  of  railway 
organized  to  own  cars,  collect  freight,  and  '^""p*"'"  '°"' 
arrange  for  the  convenient  dispatch  of  long-distance  traffic. 
Between  1850  and  iS/oanincreasingdegree of  cooperation 
was  reached  by  connecting  lines,  and  the  service  which 
railways  could  render  the  country  was  vastly  enlarged. 
In  this  manner,  during  the  period  just  mentioned,  a  ra{> 
idly  growing  business  between  the  Mississippi  Valley 
and  the  Atlantic  seaboard  was  developed. 


204  RAILROAD   TRANSPORTATION 

%  139.   Meanwhile  the  combination  of  short  connect- 
ing roads  into  trunk  hnes  had  begun.      In  1853  the  New 
York  Central  was  formed  by  the  consoHdation 

Trunk  lines.         .  . 

of  the  various  roads  between  Albany  and 
Buffalo ;  and  sixteen  years  later  the  Hudson  River  Rail- 
road was  added  to  it,  securing  a  connection  with  the 
city  of  New  York.  A  similar  process  went  on  elsewhere 
during  the  fifties  and  sixties  until,  by  1870,  there  were  a 
number  of  railroads  that  operated  from  200  to  1000  miles 
of  line.  Between  the  Atlantic  seaboard  and  points  on 
Lake  Erie  and  the  Ohio  River,  the  New  York  Central, 
the  Erie,  the  Pennsylvania,  and  the  Baltimore  and  Ohio 
roads  were  reaching  out  for  western  business;  while  in 
the  Mississippi  Valley  various  trunk  hnes  had  estabHshed 
through  service  between  Chicago  and  the  terminals  of 
the  eastern  roads,  or  had  pushed  out  into  the  West  and 
Northwest  and  even  to  the  Pacific  coast. 

§  140.  The  next  step  in  railway  combination  was  the 
union  of  eastern  roads  with  those  in  the  Mississippi  Valley. 
Railway  ^y  purchase  or  lease,  the  New  York  Central, 
systems.  ^.j^g  Pennsylvania,  and  the  others  secured 
control  of  hnes  that  gave  them  entrance  into  Chicago 
and  St.  Louis.  Thus  our  first  railway  systems  were  de- 
veloped. These  consisted  of  a  number  of  different  com- 
panies united  under  a  single  management  and  operating 
several  thousand  miles  of  road,  some  of  it  owned  in  fee 
by  the  parent  corporation,  other  portions  controlled  by 
purchase  of  stock,  others  by  lease,  and  still  others  con- 
sisting of  roads  built  and  financed  by  the  parent  company 
for  the  purpose  of  rounding  out  its  system.  By  1890 
some  of  the  largest  systems  controlled  from  4000  to  500? 


RAILROAD   COMPETITION'  AND   COMBINATION    205 

miles  of  road,  consisting  sometimes  of  parallel  lines,  but 
to  a  larger  extent  representing  a  union  of  connecting 
railways.-^ 

§  141.  This  process  not  only  increased  the  size  of  the 
railways,  but  it  altered  materially  the  character  of  their 
operations.     The     original     local     Hnes    had  ^^ 

^  ...        The  growth 

enjoyed   a   monopoly   in  their  respective  dis-  ofcompeti- 

.  .  .  ,     .  -Ill  tion. 

tricts,  competition  being  possible  only  at  a 
few  points  where  rival  roads  met  or  water  transportation 
was  available.  But  the  trunk  Unes  could  compete  with 
each  other  for  through  traffic,  which  had  grown  to  very 
large  proportions,  and  the  sharpest  rivahy  soon  developed. 
For  a  few  years  prior  to  i860  the  eastern  trunk  hnes  were 
bidding  for  western  business,  and  their  rivalry  was  greatly 
intensified  when,  in  1869,  the  Pennsylvania  and  New 
York  Central  secured  firm  control  of  Chicago  connec- 
tions. "In  1868  rates  from  Chicago  to  New  York  stood 
at  $1.88  per  100  pounds  for  first-class  goods,  and  $0.82 
for  fourth  class.  In  the  summer  of  1869  they  fell,  under 
the  stress  of  competition,  to  a  common  rate  of  $0.25  per 
100  pounds  on  all  classes."  At  that  time  the  new  charges 
were  ruinously  bw,  and  accordingly  rates  advanced 
to  a  materially  higher  level  from  1870  to  1874.  But  in 
the  latter  year  the  Baltimore  and  Ohio  secured  entrance 
into  Chicago,  and  a  Canadian  line  entered  the  field. 
Immediately  a  new  period  of  cut-tliroat  competition  began, 
which   carried   first-class   rates   down   to  $0.25    per    100 

'  West  of  Chicago  and  St.  I.ouis,  however,  the  great  systems  radiated 
from  these  centers,  and  consisted  of  a  number  of  arms  reaching  out  inta 
the  grain  regions,  where  most  of  their  freight  was  secured.  Cf.  HaX)LEY, 
Railroad  TransporlatioQ,  86. 


2o6  RAILROAD  TRA^rSPORTATION' 

pounds,  and  fourth-class  to  $o.i6.  This  warfare  wa9 
brought  to  an  end  in  1877  by  the  establishment  of  a  pool, 
a  device  which  had  already  been  employed  in  other  parts 
of  the  country  in  order  to  meet  similar  conditions. 

§  142.   In  the  railroad  pool  the  through,  or  competitive, 

traffic  was  divided  between  the  various  roads  in  certain 

proportions;  or  else,  without  actually  diverting 

The  pool.  ^    .   ,       ,  ,.  ,  ; 

freight  from  one  line  to  another,  the  revenue 
which  accrued  from  competitive  business  was  apportioned 
in  some  manner  that  was  considered  equitable.  By  this 
means  the  inducement  to  cut  established  rates  was  par- 
tially removed,^  and  freight  charges  could  be  maintained  at 
profitable  figures.  The  agreement  formed  by  the  trunk 
lines  in  1877  was  maintained  with  more  or  less  success 
until  1 88 1,  when  it  was  broken  by  a  dispute  concerning 
the  comparative  rates  charged  from  Chicago  to  the  various 
eastern  seaports.  The  pool  was  subsequently  renewed, 
and  with  varying  fortunes  continued  until  1887.  In  other 
parts  of  the  United  States,  also,  similar  arrangements 
were  maintained  with  more  or  less  success,  so  that  the 
general  outcome  of  the  sharp  competition  which  had 
arisen  about  1870  had  been  to  drive  the  railroads  into 
that  form  of  combination  known  as  the  pool. 

The  great  weakness  of  the  device  arose  from  the  fact 
that  the  courts  held  that  pooling  contracts  had  the  effect 
of  restraining  trade  and  were  contrary  to  public  policy, 

1  Pools  did  not  wholly  remove  the  inducement.  They  were  established 
for  definite  perio  Is  of  time,  and  at  their  expiration  a  new  allotment  of 
traffic  or  revenue  was  necessary  in  order  to  continue  the  arrangements. 
Roads  dissatisfied  with  the  amount  of  business  or  receipts  allotted  to  them 
would  often  cut  rates  secretly  in  order  to  increase  their  traffic  to  a  point 
that  would  force  the  pool  to  grant  them  a  larger  allotment  in  the  future. 


RAILROAD    COMPETITION'  AND    COMBINATION     207 

SO  that  such  agreements  could  have  no  legal  standing 
and  could  not  be  enforced  as  valid  contracts.  It  fol- 
lowed that  pools  could  have  no  more  strength  Legal  status 
than  might  arise  from  the  appeal  which  they  o^^i^epooi. 
could  make  to  the  interest  or  good  faith  of  the  members. 
It  usually  proved  difficult  to  satisfy  all  the  parties  to 
pooHng  agreements,  and  some  roads,  especially  the  weaker 
ones,  were  constantly  tempted  to  violate  their  pledges. 
By  means  of  extra-legal  penalties,  such  as  fines,  a  certain 
amount  of  discipline  was  maintained;  and  various  im- 
provements in  organization  and  management  made  some 
of  the  later  pools  much  stronger  than  the  earlier. 

Here  matters  hung,  when,  in  1887,  Congress  passed 
the  Interstate  Commerce  Law  which  prohibited  all  poohng 
contracts.  This  action  was  followed  by  a  Pooling  pro- 
reorganization  of  the  various  railway  associa-  •'^^'*®^- 
tions,  by  which  it  was  sought  to  eliminate  the  feature  of 
pooling  and  yet  hold  the  members  together  in  such  a 
manner  as  to  prevent  a  renewal  of  rate  cutting.  Traffic 
associations,  therefore,  under  various  names  and  forms 
of  organization,  maintained  their  existence;  and  endeav- 
ored, with  varying  success,  to  prevent  disturbances  of 
rates.  In  1897  the  Supreme  Court  decided  that  the  Trans- 
Missouri  Freight  Association,  formed  for  the  professed 
purpose  of  "establishing  and  maintaining  reasonable 
rates,  rules,  and  regulations,"  was  an  illegal  combination 
to  restrain  interstate  commerce,  such  as  had  been  pro- 
hibited by  the  Anti-Trust  Law  of  1890.  At  the  time., 
this  decision  was  thought  to  be  a  final  blow  at  the  railroad 
pool;  but  it  appears  that  traffic  associations  of  one  sort 
or  another  continue  to  exist  and  to  exercise  some  control 
over  railway  ratea. 


2o8  RAILROAD   TRANSPORTATION 

§  143.   The   earliest   railway   combinations   had   taken 

the  form  of  unions  of  connecting  roads,  or  of  radiating 

lines   that   belonged   naturally   to   one   parent 

Later  rail-  fa  J  r 

roadconsoii-  stem.  The  pool,  however^  was  an  attempt 
to  secure  united  action  between  parallel,  or 
competing,  railway  systems;  it  was  designed  to  regulate 
or  do  away  with  competition.  Prior  to  1870  the  result 
of  combination  had  been  to  intensify,  or  even  to  create, 
competition;  since  that  date  its  consequence  has  usually 
been  to  diminish  or  destroy  it.  Whether  the  pool  would 
have  proved  a  final  adjustment  of  the  relations  of  com- 
peting lines  cannot  be  determined  with  certainty,  but 
it  seems  probable  that  in  time  various  causes  would  have 
led  to  the  establishment  of  a  closer  and  more  permanent 
union  of  parallel  roads.  As  it  was,  however,  the  law  of 
1887,  by  prohibiting  pooling,  turned  the  attention  of  rail- 
way managers  to  other  methods  of  controlling  competi- 
tion and  accelerated  very  greatly  the  process  of  consolida- 
tion. The  pool  was  illegal;  but  there  was  nothing  to 
prevent  one  road  from  securing  control  of  a  competing 
line  by  lease,  by  purchase  of  stock,  or  by  new  methods 
which  were  devised. 

In  some  cases  the  same  group  of  capitalists  secured 

control  of  competing  lines,  without  attempting  a  formal 

consolidation;    in  others,   different  groups  of 

Methods  of  '  '  . 

consoiida-  magnates  effected  an  interchange  of  holdings 
of  stock  and  of  directors,  thus  securing  a  ''  com- 
munity of  interest."  Finally  the  device  known  as  the 
holding  company  was  resorted  to,  and  might  have  been 
very  widely  employed  if  the  courts  had  not  decided  that 
the    famous   Northern   Securities    Company,    formed    to 


RAILROAD   COMPETITION  AND   COMBINATION    209 

hold  the  stock  of  the  Northern  Pacific  and  Great  Northern 
railways,  was  an  illegal  combination  under  the  terms  of 
the  Anti-Trust  Law  of  1890.  How  this  decision  will 
affect  certain  other  holding  companies  cannot  be  deter- 
mined at  the  present  time;  but  it  will  not  do  more  than 
retard  shghtly  the  unification  of  railway  interests.  The 
holding  company  would  have  been  the  most  popular 
device,  since  it  would  have  enabled  a  few  magnates  to 
control  vast  properties  with  the  smallest  investment  in 
their  securities  (§  41).  Yet  there  is  nothing  to  prevent 
capitalists  from  bringing  competing  railroads  under  their 
control,  or  estabhshing  a  community  of  interest  with  the 
owners  of  other  great  railway  systems. 

Prior  to  1890,  as  we  have  seen,  5000  miles  of  Hne  were 
the  most  that  had  been  brought  under  the  control  of  a 
single  management;   since  that  date,  the  com- 

Results  01 

bination  of  competing  lines  has  given  us  great  consoiida- 
railway  systems  that  operate  from  10,000  to 
22,000  miles.  In  1902  there  were  nineteen  systems  which 
controlled  i65;000  out  of  the  203,000  miles  of  railroad  in  the 
United  States;  and  of  these,  the  eight  largest  controlled 
129,000  miles,  or  two  thirds  of  the  total  mileage  of  the 
country.^  Then,  too,  more  or  less  close  relationships  are 
known  to  exist  between  several  of  the  nineteen  great 
railway  systems;  so  that  no  less  than  82,000  miles  of  road 
are  now  controlled  by  interests  which  seem  to  have  come 
to  an  understanding  with  one  another.  It  is  a  striking 
fact  that,  since   1890,   consolidation  has  proceeded  very 

■•  For  descriptions  and  mai)S  of  the  {jreat  railway  systems,  see  Johnson, 
American  Railway  Transjx^rtalion,  52-68  ;  also  The  IVorld^s  Work 
February^   iyo2;    Review  of  Reviews,  August,   lyoi. 


2IO  RAILROAD   TRANSPORTATION 

largely  upon  a  territorial  basis,  the  purpose  and  result 
being  generally  to  bring  all  the  important  roads  in  any 
i-egion  under  one  management.  Northern  New  England, 
for  instance,  falls  to  one  road  and  southern  New  England 
to  another.  The  Vanderbilt  and  Pennsylvania  systems 
occupy,  respectively,  the  northern  and  the  southern  por- 
tions of  the  territory  north  of  the  Ohio  or  the  Potomac 
and  east  of  the  Mississippi,  although  at  some  points  their 
lines  penetrate  each  other's  fields;  below  the  rivers  just 
mentioned,  we  find  two  other  systems  which  divide  most 
of  the  traffic  of  the  South;  and  in  the  Northwest  a  close 
combination  of  transcontinental  lines  has  been  effected.^ 
The  same  result  has  been  reached  in  other  countries 
where  the  roads  have  remained  under  private  manage- 
ment. This  is,  perhaps,  indicative  of  what  the  future 
of  railway  consolidation  is  to  be.  It  is  very  probable, 
indeed,  that  each  section  of  the  country  will  finally  fall 
to  the  control  of  a  single  system  which  will  either  operate 
or  dominate  all  the  important  lines  of  road. 

§  144.   The  general  reasons  for  railway  consolidation 

should  already  be  clear  to  the  student  who  has  mastered 

our  previous  discussion  of  large-scale  produc- 

Reasons  for         _        '^       ^  . 

consoiida-        tion  and  monopoly.     In  the  first  place  a  rail- 

tion.  1  •  r 

road  represents  a  very  large  mvestment  01 
fixed  capital,  and  must  incur  many  other  charges  that  are 
fixed  and  do  not  var}'  with  the  amount  of  business  trans- 
acted. Interest  on  bonded  debt,  a  large  share  of  the 
taxes  paid,  salaries  to  important  officials,  remain  the  same, 
whether  the  amount  of  business  is  larger  or  smaller;   the 

1  South  and  west  of  St.  Louis  the  silur'io-i  is  not  so  clearly  defined, 
and  a  number  of  different  systems  are  yet  in  existed)^. 


RAILROAD  COMPETITIOI^  AND   COMBINATION-    211 

cost  of  maintaining  the  roadbed,  track,  and  structures 
will  be  somewhat  greater  when  the  traffic  is  heaxy,  but 
will  not  be  increased  proportionately,  by  any  means; 
while  the  actual  expense  of  handhng  freight  and  moving 
trains  is  about  the  only  element  that  will  vary  with  the 
volume  of  business.^  For  this  reason  it  is  better  for  a 
road  to  accept  traffic  at  any  price  that  will  more  than  meet 
the  cost  of  handling  and  moving  it  —  even  though  the 
surplus  above  variable  expenses  is  far  less  than  enough 
to  cover  the  full  amount  of  the  fixed  outlays  fairly  charge- 
able to  it  —  rather  than  to  lose  the  business  and  earn 
nothing  whatever  toward  meeting  the  fixed  charges  (§  69). 
Therefore,  whenever  the  competition  between  parallel 
lines  becomes  intense,  freight  rates  fall  to  exceedingly  low 
figures,  and  the  struggle  that  ensues  is  not  inappropriately 
described  as  a  cut-throat  contest.  Moreover,  unlike  a 
store  or  factor}-,  a  road  that  is  bankrupted  by  its  losses 
does  not  go  out  of  existence;  but  it  passes  into  the  hands 
of  a  receiver,  ana  continues  to  compete  for  business,  often 
more  recklessly  than  before.  In  the  railway  industry, 
therefore,  competition  is  likely  to  entail  severe  losses, 
and  to  drive  rival  lines  into  some  form  of  combination. 

In  the  next  place,  since  the  service  which  railways  offer 
can  be  utilized  only  in  connection  with  an  expensive  plant, 
the  construction  of  a  parallel  line  involves  a  wastes  of 
needless  duplication  of  facilities  in  many  in-  competition. 
stances  and  is  not  desirable,  even  from  the  point  of  view 
of  the  public.     It  was  originally  supposed  that  railroad 

1  Even  here,  by  loadinK  cars  to  their  nia\imuin  capacity,  and  increasing 
the  size  of  a  freifjht  train,  a  larger  volume  o(  business  can  be  handled  at  a 
lower  average  cost 


212  RAILROAD   TRANSPORTATION 

charges  could  be  kept  at  a  fair  level  by  competition ;  and 
that,  if  a  company  already  in  the  field  exacted  excessive 
rates,  relief  could  be  secured  by  chartering  a  rival  road. 
In  this  way  millions  of  dollars  have  been  wasted  in  build- 
ing unnecessary  hnes;  yet  the  drift  toward  consoHdation 
has  not  been  checked,  since  ultimately  the  rival  companies 
have  found  it  advantageous  to  combine.  Consolidation, 
in  all  such  cases,  enables  companies  to  reduce  expenses 
and  improve  facilities;  and  it  may  be  considered  the 
inevitable  outcome  of  attempts  to  secure  competition. 

Finally,  it  cannot  be  doubted  that  another  motive  for 

consolidation   has   been   the   desire   to   secure    monopoly 

power.     A  railroad,  as  we  shall  see,  can  never 

Monopoly. 

possess  an  absolute  monopoly;  for,  except 
over  local  business,  its  power  to  control  rates  is  limited 
in  various  ways.  But  between  a  rate  that  will  yield  a 
fair  return  upon  the  capital  actually  invested,  and  a  charge 
that  will  enable  a  company  to  pay  the  highest  possible 
dividends,  there  is  often  a  striking  difference;  and  the 
monopoly  profits  that  may  be  derived  from  combination 
have  been  one  cause  of  the  movement  in  that  direction. 
For  this  reason  evtry  step  in  the  growth  of  monopoly  in  the 
transportation  industry  has  intensified  the  pubhc  demand 
for  governmental  control  over  the  railways,  a  problem 
which  was  never  so  important  as  it  is  to-day,  and  one  which 
will  require  careful  consideration  in  a  subsequent  part 
of  this  chapter. 

II.  Railroad  Rates 

§  145.   Although,   as  we  have  seen,   it  was  originally 
supposed  that  the  chief  work  of  the  railway  would  be  the 


RAILROAD  RATES  21  ^ 

transportation  of  passengers,  the  event  has  proved  that 
the  freight  service  far  exceeds  all  the  other  branches.  In 
1 910,  for  instance,  the  railroads  of  the  United  Freight 
States  earned  $1,925,500,000  from  freight,  ^^^^^^ 
$628,900,000  from  passengers,  $116,100,000  from  mail 
and  express  business,  and  $80,100,000  from  miscellaneous 
sources.  Thus  it  appears  that  about  three  quarters  of 
the  total  receipts  of  American  roads  come  from  the  trans- 
portation of  freight. 

Even  more  important  than  the  financial  aspect  of  this 
branch  of  traffic  is  the  influence  which  the  freight  service 
exerts  upon  the  business  of  the  country.  It  is  Freight 
desirable,  of  course,  that  people  should  be  able  ^^^^^' 
to  travel  where  they  will  at  reasonable  rates ;  but  passenger 
fares  are  of  far  less  economic  consequence  than  the  rates 
charged  for  carrying  commodities.  Freight  charges  are 
an  integral  part  of  the  cost  of  producing  all  goods  that 
are  carried  by  railways,  and  arc  felt  by  every  person  in  the 
community;  in  fact,  their  universality  and  inevitableness 
have  led  many  writers  to  the  conclusion  that  they  resemble 
taxes.  Passenger  rates,  on  the  other  hand,  enter  to  a  much 
smaller  extent  into  the  cost  of  conducting  business  enter- 
prises, and  have  far  less  effect  upon  productive  industr}\ 

Further  still,  freight  rates  not  only  affect  all  consumers, 
but  go  far  toward  determining  the  fortunes  of  producers. 
A  difference  of  a  quarter  or  an  eighth  of  a 

'  _  "^  The  influence 

cent  in   the  cost  of  transportation   may  have  of  freight 
the  effect  of  localizing  production  in  one  region 
instead  of  another;    while  if  railroads  are  permitted   to 
discriminate  between  persons,  freight  rates  may  destroy 
the  business  of  one  man  and  build  up  that  of  gome  otiicr. 


214 


RAILROAD   TRANSPORTATION 


Localities  that  are  fortunate  enough  to  enjoy  access  to 
water  routes  are  somewhat  less  dependent  on  this  factor, 
but  elsewhere  the  person  who  adjusts  freight  tariffs  pos- 
sesses what  may  prove  the  power  of  life  and  death  ovei 
the  majority  of  producers.  It  is  for  these  reasons  that  the 
question  of  freight  rates  has  come  to  be  regarded  as  the 
most  important  part  of  the  railroad  problem. 

§146.   When   the   first    railways   were   constructed,    it 

was  supposed  that  the  charges  for  carrying  persons  or 

goods  would  be  adjusted  readily  enough  upon 

Rate-making.    ^  ,       .      t,        ,  n  n  1 

a  uniform  mileage  basis,  nke  the  toils  collected 
for  the  use  of  turnpikes  or  canals;  and  various  attempts 
were  made  to  enforce  such  simple  tariffs.  Here,  again, 
original  theories  had  to  be  abandoned  after  a  brief  trial, 
especially  in  the  case  of  freight  charges.  In  the  first  place, 
it  was  soon  perceived  that  bulky  products  would  not  bear 
the  same  rates  as  goods  which  possessed  great  value  in 
small  bulk.  If  a  road  should  undertake  to  charge  as  much 
for  hauling  lumber  or  grain  or  stone  as  for  carrying  fur- 
niture or  dry  goods,  the  bulky  articles  would  never  be 
carried  at  all;  whereas,  if  it  should  charge  no  more  for 
the  latter  commodities  than  it  must  concede  to  the  former, 
the  total  earnings  would  little  more  than  cover  the  cost  of 
operating  trains.  Obviously  tariffs  must  be  adjusted  in 
some  manner  to  the  value  of  the  articles  carried ;  and  the 
result  has  been,  in  the  United  States,  the  development  of 
elaborate  systems  of  freight  classification,^  by  which  the 
railways  endeavor  to  adjust  their  charges  to  what  the 
traffic  will  bear. 

^  See  Johnson,  Railway  Transportation,  113  et  seq.,  for  a  description  of 
the  three  systems  of  classification  now  in  force  in  the  United  States. 


RAILROAD  RATES  215 

As  soon  as  the  uniform  system  of  tolls  was  abandoned, 
the  adjustment  of  freight  rates  became  an  exceedingly 
intricate  problem.  In  the  first  place,  it  would  itscompiex- 
be  impossible,  even  if  it  were  desirable,  to  ^*^®®' 
pay  much  consideration  to  the  cost  of  transporting  each 
particular  commodity.  Railroads  transport  thousands 
of  different  articles  in  the  same  freight  train,  or  even  the 
same  cars;  and  no  one  can  possibly  compute  the  share  of 
the  total  expenses  that  is  fairly  chargeable  to  each  article. 
It  is  possible  to  ascertain  with  tolerable  accuracy  the  cost 
of  making  up  and  running  a  freight  train  loaded  with  a 
single  commodity;  but  if  different  articles  are  carried,  it 
is  not  practicable  to  determine  what  precise  part  of  the 
total  cost  should  be  attributed  to  each. 

The  situation  is  rendered  the  more  peculiar  by  the  fact 
that  so  large  a  part  of  the  total  expenses  of  a  railroad  is 
fixed  and  does  not  vary  with  the  volume  of  Different 

classes  of 

traffic  that  is  secured.  The  cost  of  operating  traffic, 
trains  is  the  element  of  expense  which  comes  the  nearest 
to  varying  in  proportion  to  the  amount  of  freight  carried; 
and  even  here  the  correspondence  is  not  exact,  since  a  con- 
siderable amount  of  additional  business  can  be  accommo- 
dated by  filling  cars  to  the  limit  of  their  capacity  or  by 
increasing  the  size  of  the  freight  train,  without  a  propor- 
tionate increase  of  expense.  It  follows  from  this  circum- 
stance that  it  is  profitable  for  a  road  to  carry  cheap  and 
bulky  products  for  anything  more  than  the  actual  cost  of 
handling  the  goods  and  moving  the  cars,  even  though  the 
charge  does  not  cover  all  of  the  fixed  expenses,  theoreti- 
cally l.'Ut  not  practically,  attributable  to  every  cominoflity 
transported.     If   something    can    be    secured    from    low- 


2l6  RAILROAD  TRANSPORTATION 

grade  traffic  toward  meeting  a  part,  of  the  fixed  expenses, 
even  though  it  be  less  than  the  full  amount  fairly  charge- 
able,  just  so  much  less  will  need  to  be  obtained  from 
commodities  of  a  higher  grade.  Such  an  adjustment  of 
rates  constitutes  a  discrimination  against  the  latter  class  of 
goods;  but,  if  the  road  could  not  secure  anything  from 
low-grade  traffic,  it  would  be  necessary  to  obtain  still  more 
from  traffic  of  a  higher  grade.  For  this  reason,  neither 
the  producer  nor  the  consumer  of  the  latter  is  injured  by 
the  concession  made  to  the  former;  on  the  contrary,  by 
reducing  rates  to  a  point  that  will  enable  bulky  goods  to 
be  transported  considerable  distances,  the  services  of  the 
railway  to  the  community  are  increased  and  all  classes  ol 
persons  are  benefited. 

Not  only  is  it  impossible  for  a  road  to  charge  a  uniform 
rate  for  all  classes  of  freight,  but  it  has  not  proved  prac- 
Locaidis-  ticable  to  adjust  the  rate  for  any  single  com- 
•riminations.  ^iQ^jji-y  q^  a  Uniform  mileage  basis.  At  various 
points  along  the  Hne  of  any  railroad,  or  at  its  terminals, 
competition  is  Hkely  to  be  encountered  from  other  railways 
or  from  water  routes.  Unless  its  rivals  are  restrained 
from  offering  low  rates  between  competitive  points,  the 
road  must  either  reduce  its  charges  at  such  places  or  lose 
all  its  competitive  traffic.  And  if,  as  it  would  naturally  do, 
it  makes  the  necessary  concessions  at  these  points,  com- 
petitive traffic  will  be  carried  at  lower  rates  than  similar 
business  passing  between  way  stations  served  by  no  other 
line.  Thus  it  comes  about  that  freight  will  be  carried 
from  one  end  of  a  hne  to  the  other  at  even  a  lower  rate 
than  is  charged  for  traffic  which  is  carried  to  some  inter- 
mediate point,  and  in  this  way  many  local  discriminations 


RAILROAD  RATES  2  1/ 

arise.  Shippers  at  the  way  stations  who  pay  the  higher 
charges  not  unnaturally  look  upon  such  a  condition  of 
affairs  as  a  grievous  hardship;  but,  if  the  discrimina- 
tions in  favor  of  the  competitive  points  are  no  larger  than 
the  rivalry  of  other  roads  makes  necessary,  they  are  both 
justifiable  and  inevitable.  Through  lines,  at  whose  ter- 
minals competition  must  be  encountered,  could  not  be 
built  if  they  were  allowed  to  charge  no  more  for  local 
traffic  than  for  competitive.  If  local  rates  should  be  re- 
duced to  the  level  of  those  granted  to  competitive  points 
the  road  could  not  make  any  money;  while  if  the  rate, 
for  competitive  traffic  wxre  raised  to  the  level  of  those 
charged  for  local,  none  of  this  business  would  be  secured. 
As  a  matter  of  fact,  if  something  can  be  secured  from  com- 
petitive business,  the  road  can  afford  to  carry  local  traffic 
for  somewhat  lower  rates  than  would  have  to  be  charged 
other^vise;  local  charges,  therefore,  are  not  higher,  but 
may  be  lower,  on  account  of  the  fact  that  competitive 
traffic  is  handled  at  reduced  prices.  It  is  true  that  the 
discriminations  in  favor  of  junction  or  terminal  points  tell 
against  the  business  of  the  way  stations ;  but  the  railroad 
merely  accepts  existing  inequalities  of  situation,  and  does 
not  create  them.  A  town  enjoying  access  to  water  routes 
had  cheaper  transportation  before  the  road  was  built; 
and  will  continue  to  have  it  afterward,  even  if  the  new 
carrier  refrains  from  bidding  for  competitive  traffic.  So, 
too,  the  construction  of  more  than  one  line  between 
two  points  creates  an  inequality  of  situation,  for  which 
neither  road  may  be  responsible,  and  to  which  freight 
rates  must  be  adjusted. 

Besides  the  competition  of  rival  routes,  the  competition 


2i8  RAILROAD   TRANSPORTATION 

of  markets  affects  railway  charges  in  a  striking  manner. 
Products  of  any  kind  that  are  carried  to  the  same  market 
Competition  f'^om  different  places  of  production  must  sell 
of  markets.  £qj.  2^io\x\.  the  Same  price.  Since  the  producer 
can  obtain  for  his  goods  no  more  than  the  market  allows, 
the  railway  cannot  charge  him  very  much  more  than  is 
exacted  by  roads  that  serve  producers  in  other  sections  of 
country  without  destroying  his  business  and  losing  his 
traffic.  If  Georgia  peaches  are  to  be  sold  in  Philadelphia 
and  New  York,  or  Alabama  iron  is  to  be  marketed  in 
Pennsylvania,  the  goods  brought  from  the  South  must  be 
carried  at  lower  mileage  rates  than  those  procured  from 
nearer  sources  of  supply.  Even  if  there  is  only  a  single 
road  or  railway  system  in  each  section  of  the  country, 
competition  for  markets  will  still  continue;  and  it  is  for 
this  reason  that  a  road  can  never  have  more  than  a  partial 
monopoly. 

Oftentimes,  however,  charging  what  the  traffic  will  bear 
has  passed  into  charging  what  it  will  not  bear,  and  railway 
Unjust  dis-  managers  have  adjusted  rates  in  an  arbitrary 
criminations.  ^^^  unjust  manner.  They  have  discriminated 
in  favor  of  places  in  which  they  or  their  associates  were 
personally  interested,  and  in  favor  of  business  enterprises 
in  which  they  had  a  personal  stake.  Worst  of  all  have 
been  personal  discriminations  between  shippers  who  were, 
upon  the  principles  above  stated,  entitled  to  equal  or  sub- 
stantially equal  treatment.  The  Standard  Oil  Monopoly 
was,  in  its  earher  days,  built  up  almost  wholly  by  outrageous 
discriminations  in  its  favor;  and  to-day,  it  is  very  doubt- 
ful whether  a  competing  company  will  not  be  ruined  if  in 
any  way  the   railroads  can  compass  its  undoing.     The 


RAILROAD  RATES  219 

monopoly  of  dressed  beef  was  established  in  a  similar 
manner,  unfair  treatment  of  independent  miners  threw 
the  anthracite  coal  fields  into  the  hands  of  a  few  railroads, 
and  in  many  other  cases  monopolies  have  been  built  up 
by  means  of  rebates  and  unjust  discriminations  between 
shippers.  Specious  arguments  have  been  advanced  in 
defense  of  the  favors  accorded  to  large  producers;  among 
other  things,  it  is  argued  that  it  costs  a  railway  less  to 
handle  freight  when  it  is  supphed  by  the  train  load  than 
when  it  must  be  gathered  up  in  small  consigmiients.  But 
the  cost  of  service  is  rejected  by  railway  managers  them- 
selves as  the  basis  for  adjusting  freight  rates,  and  it  can- 
not be  appealed  to  in  support  of  practices  that  foster 
monopoly.  Charges  cannot  be  adjusted  upon  a  basis 
of  absolute  uniformity,  such  as  is  attained  by  a  system 
of  tolls;  but  it  is  possible  and  highly  desirable  to  elimi- 
nate absolutely  all  personal  discriminations.  That  it 
costs  less  to  handle  a  train  load  than  a  car  load  should  not 
weigh  for  an  instant  against  the  desirability  of  allowing 
all  producers  to  use  the  national  highways  upon  equal 
terms.  This  is  a  case  in  which  discrimination  is  as  inad- 
missible as  it  would  be  in  the  adjustment  of  postal  rates, 
even  though  the  latter  item  is  a  much  smaller  factor  in 
the  cost  of  production  than  the  charge  for  transporting 
freight. 

We  cannot  consider  further  the  intricate  problems  con- 
nected with  the  adjustment  of  railway  rates.  It  has  been 
shown  that  a  uniform  system  of  tolls  is  impossi- 

•  1  1  1-11  11         1        •  Summary. 

blc  and  undesirable,  and  that  basmg  rates  upon 
the  cost  of  each  particular  service  is  undesirable  and  im- 
possible.    Freight  charges  must  be  adjustefj  to  what  the 


220  RAILROAD   TRANSPORTATION 

traffic  will  bear ;  it  is  necessary  to  discriminate  in  favor  of 
bulky  products  and  competitive  business;  and  producers 
cannot  be  made  to  pay  more  than  the  competition  of  mar- 
kets will  permit.  Against  these  hard  facts,  restrictive  or 
regulative  legislation  will  beat  in  vain;  and  a  rational 
pohcy  toward  the  railway  must  proceed  in  a  fuU  recogni- 
tion of  the  conditions  of  the  rate  problem. 

III.  Public  Control  of  Railroads 

§  147.   Prior  to  1870  the  chief  problem  connected  with 
railways  in  the  United  States  was  that  of  securing  the  con- 
struction of  the  roads  needed  to  handle  the  exist- 

Early  policy  .  ,     .        ,       . 

toward  rail-  ing  volumeof  traffic  and  to  provide  for  the  future 
development  of  the  country.  So  necessary  was 
it  for  every  community  or  section  to  obtain  railroad  facili- 
ties that  our  various  governments,  local,  state,  and  national, 
aided  construction  by  grants  of  land  or  money;  while 
ever}'where  the  disposition  of  the  people  was  most  friendly 
to  railway  enterprises.  The  charters  of  some  of  the  earher 
roads  and  occasional  statutes  placed  certain  restrictions 
upon  profits,  or  attempted  to  prescribe  systems  of  tolls,  for 
goods  and  passengers,  such  as  had  been  arranged  for  turn- 
pikes or  canal  companies.  In  New  England,  moreover, 
some  states  estabhshed  railroad  commissions  with  Hmited 
powers  of  supervision  and  control.  But,  in  general,  little 
serious  effort  had  been  made  to  regulate  or  control  the 
railroads  of  the  country;  and  it  seems  to  have  been  as- 
sumed that  competition  would  oblige  the  companies  to 
provide  good  service  at  reasonable  prices. 

§  148.    But  a  few  years  after  the  Civil  War  the  attitude 
of  our  people  toward  the  railways  began  to  change,  and 


PUBLIC  CONTROL  OF  RAILROADS  221 

about  1870  a  great  deal  of  dissatisfaction  arose  in  the 
northern  part  of  the  Mississippi  Valley.  After  con- 
siderable agitation  of  the  subject,  laws,  called  ^^^^^^^^^^^ 
Granger  laws,  were  enacted^  in  Illinois,  Iowa,  of  a  railway 

.  .  problem. 

Minnesota,  and  Wisconsin,  and  then  in  other 
states,  which  were  intended  to  correct  various  abuses  that 
were  believed  to  exist.  That  the  farmer  had  real  griev- 
ances cannot  be  doubted ;  not  only  were  rates  frequently 
extortionate  in  themselves,  but,  still  worse,  unjustifiable 
local  and  personal  discriminations  greatly  aggravated  the 
situation.  Some  of  the  new  statutes,  however,  were  un- 
wise and  even  unjust  to  the  railroads;  and  it  was  found 
necessary  to  repeal  them  or  to  amend  materially  their 
provisions. 

The  managers  of  the  railways,  when  the  hostile  legisla- 
tion was  enacted,  went  into  the  courts  and  endeavored  to 
have  it  declared   unconstitutional.     They  as-  Thepuwic 
serted  that  their  roads  were  private  enterprises  tue'ranroad 
and  that  a  legislature  could  no  more  regulate  '"^smess. 
the  prices  charged  or  service  offered  than  it  could  control 
the   details   of  any   other  business.     This   position   was 
contrary  to  the  well-established  principles  of  the  common 
law,  by  which  common  carriers  were  subject  to  public 
regulation  in  so  far  as  it  might  be  needed  to  insure  the 
general  welfare.     And  it  appears  httle  short  of  humorous 
when  one  considers  that  the  very  companies  that  now 
claimed  to  be  purely  private  enterprises  had  originally 
asked  and  received  the  power  to  condemn,  under  right  of 

*  These  are  known  as  the  Grander  laws,  since  they  were  enacted  in 
response  to  the  demand  of  the  (Grange,  an  association  that  was  then  wide 
spread  in  these  states.     See  Haulky,  Railway  Transportation,  133-136 


222  kAILROAb  TRAMSPORTATION- 

eminent  domain,  the  land  needed  for  the  construction  of 
their  hnes,  upon  the  theory  that  they  were  undertaking 
work  of  great  pubhc  utility  and  importance.  In  1877  the 
Supreme  Court  decided,  once  for  all,  that  a  railway  per- 
forms a  service  that  is  of  pubhc  interest;  and  that, 
although  the  company  remains  a  private  corporation,  it 
is  subject  to  legislative  regulation.  By  subsequent  deci- 
sions the  court  has  reserved  to  itself  the  power  of  deciding 
what  acts  of  a  legislature  are  to  be  deemed  a  reasonable 
and  necessary  exercise  of  the  supervisory  power  which  it 
'■3  declared  to  possess,  but  since  that  time  the  pubhc  char- 
acter of  railway  transportation  has  not  been  open  to  fur-  ■ 
ther  debate. 

§  149.  The  most  tangible  outcome  of  the  Granger 
movement  was  the  establishment  of  various  railway  com- 
state  railroad  missions  in  the  West  and  South  with  power  to 
regulate  charges  and  otherwise  control  the 
transportation  industry.  Meanwhile,  in  the  East,  another 
type  of  commission  had  been  developed,  which  possessed 
no  power  to  issue  orders  to  the  railways,  but  was  author- 
ized to  collect  information  and  make  recommendations  to 
the  legislature.  Although  appearing  to  possess  greater 
authority,  most  of  the  so-cahed  mandatory  commissions 
actually  accomphshed  less  than  the  advisory  commission 
of  Massachusetts.  In  that  state  the  high  character  of  the 
commission  itself,  the  fact  that  the  railroads  were  older 
and  more  stable,  and  the  influence  of  an  alert  public 
opinion,  resulted  in  the  enactment  of  beneficial  laws  or 
the  acceptance  by  the  roads  of  many  of  the  recommenda- 
tions that  were  made.  Under  different  conditions,  how- 
ever, the  Massachusetts  plan  would  not  have  produced  a 


PUBLIC  CONTROL   OF  RAILROADS  223 

satisfactory  result;  and  the  tendency  in  recent  years  has 
been  toward  giving  the  state  commissions  mandatory  as 
well  as  advisory  powers.  At  the  present  time  some 
thirty-two  of  the  states  have,  established  commissions 
that  exercise  more  or  less  control  over  railroads. 

§  1 50.  The  control  which  the  states  attempted  to  exercise 
by  statute  or  through  commissions  extended  for  some  years 
to  all  railroad  traffic,  interstate  as  well  as  intra-  „^ 

'  The  Inter- 

state; but  in  1886  the  Supreme  Court  decided  state  com- 

that  a  state  could  regulate  only  the  latter,  the 
former  being  declared  to  be  subject  exclusively  to  national 
control.  This  decision  took  away  from  the  state  commis- 
sions a  considerable  part  of  their  power,  and  intensified 
greatly  the  desire  for  federal  regulation  of  the  railways. 
Accordingly,  in  1887,  Congress  enacted  the  Interstate 
Commerce  Law,  upon  which  most  later  discussions  of 
railroad  control  have  turned. 

The  act  of  1887  apphed  only  to  interstate  traffic,  but 
contained  a  number  of  far-reaching  provisions.  It  pro- 
hibited extortionate  charges  and  also  all  un-  itsprovi- 
reasonable  discriminations  between  persons,  ®'°°® 
localities,  or  different  classes  of  traffic.  Then,  more  spe- 
cifically, it  prescribed  that  no  common  carrier  subject  to 
the  act  should  charge  more  for  transporting  passengers  or 
goods  a  shorter  distance  than  it  received  for  a  longer,  the 
conditions  being  substantially  the  same  and  the  shorter 
distance  being  included  in  the  longer.'     It  also  prohibited 

'  This  had  the  effect,  not  of  prohibiting  local  discriminations,  but  of 
limiting;  them  to  such  a  degree  that  the  competitive  point  could  not  actu- 
ally receive  a  lower  rate  than  the  station  not  favored  by  competition.  Of 
courie  a  local  discrimination  not  great  enougii  to  make  the  charge  for  a 


224  RAILROAD  TRANSPORTATION 

the  pooling  of  freight  traffic  or  of  aggregate  money  earnings 
by  railways,  with  the  purpose  of  obliging  the  roads  to  com- 
pete with  one  another ;  in  fact,  the  principle  that  competi- 
tion can  and  should  control  the  industry  of  transportation 
was  that  upon  which  the  entire  law  was  based.  Other 
provisions  of  the  act  required  pubhcity  of  rates  and  some 
other  things  which  cannot  be  considered  here.  Finally 
an  interstate  commerce  commission  was  appointed  to 
enforce  the  law,  and  given  powers  that  were  supposed  to 
be  ample  for  that  purpose.  This  body  was  to  receive 
complaints  from  shippers  or  others,  investigate  them,  and 
adjudicate  the  cases  as  they  might  arise;  but  the  rail- 
roads, of  course,  could  appeal  from  the  decisions  of  the 
commission  to  the  courts  of  law.  The  intention  of  Con- 
gress was  that  all  questions  of  fact  should  be  studied  and 
decided  by  the  commission,  and  that  any  legal  problems 
that  might  be  involved  should  be  settled  by  the  courts. 

§  151.  The  actual  results  of  the  Interstate  Commerce 
Law  fell  very  far  short  of  the  expectations  of  its  framers» 
Results  of       largely  on  account  of  legal  difficulties  which 

federal  regu-  °     "^  .     .  ... 

lation.  the    commission    encountered    in    its    eiiorts 

to  enforce  the  act.  When  the  commission  appealed 
to  the  courts  to  enforce  its  orders,  or  railroads  insti- 
tuted suits  in  order  to  obtain  a  modification  of  them,  the 
courts  did  not  accept  as  final  the  facts  ascertained  by 
the  commission ;  but  reheard  the  cases  in  all  details, 
even  allowing  the  carriers  to  introduce  new  evidence  not 
submitted  at  the  original  hearing.  The  effect  of  this  was, 
on  the  one  hand,  to  encourage  the  roads  not  to  make 

long  haul  less  than  that  for  a  short  haul  might  be  condemned  by  the  com- 
mission as  unreasonable  under  the  previous  provisions  of  the  act. 


PUBLIC  CONTROL   OF  RAILROADS  225 

a  full  disclosure  of  their  cases  before  the  commission, 
whereby  its  authority  and  efficiency  were  impaired.  And, 
on  the  other  hand,  the  necessity  of  rehearing  each  case  in 
all  its  details,  first  in  the  lower  courts,  then  in  the  higher 
if  an  appeal  was  taken,  led  to  much  protracted  litigation 
which  resulted  in  what  was,  to  all  intents  and  purposes,  a 
denial  of  relief  to  shippers. 

Furthermore,  the  Supreme  Court  limited  very  nar- 
rowly the  powers  of  the  commission.  For  a  number  of 
years  after  the  enactment  of  the  law,  the  com- 

'  The  powers 

mission,  when  it  found  that  existing  charges  ofthecom- 

.  mission. 

were  unreasonable,  undertook  m  many  cases 
to  determine  what  rates  would  be  reasonable.  But  the 
Court  at  last  decided  that  the  law  of  1887  conferred  no 
such  authority  upon  the  commission,  and  intrusted  it 
with  nothing  more  than  the  power  of  deciding  whether 
existing  rates  were  reasonable  or  not.  Since  the  only 
adequate  remedy  for  an  unjust  rate  is  the  establishment 
of  a  just  one,  this  decision  stripped  the  commission  of  all 
real  control  over  railway  charges. 

The  fate  of  the  long-  and  short-haul  clause  of  the  act 
of  1887  is  equally  interesting.  The  law  did  not  prohibit 
charging  more  for  a  short  haul  than  a  long  haul  Long  and 
in  cases  where  the  conditions  were  dissimilar;  s^°''t^*"^s- 
and  the  commission  soon  decided  that  competition  of 
water  routes  or  intrastate  railroads  not  subject  to  its  author- 
ity might  be  sufTicicnt  to  make  the  conditions  so  unlike  as 
to  justify  a  lower  charge  for  a  long  haul.  The  Supreme 
Court,  however,  in  the  test  case,  held  that  competition  of 
other  roads  subject  to  the  act  was  enough  to  modify  the  situ- 
ation and  justify  a  lower  rate  for  a  longer  distance.    The 


226  PUBLIC   CONTROL    OF  RAILROADS 

result  was  that  in  all  cases  where  any  sort  of  competition 
prevailed,  railroads  could  adjust  their  charges  as  they 
pleased,  so  that  the  long-  and  short-haul  clause  was 
practically  of  no  effect. 

But  although  in  many  important  matters  the  Interstate 
Commerce  Law  proved  a  disappointment,  the  act  pro- 
Qtijer  duced  a  number  of  excellent  results.     Greater 

details.  publicity  of  railroad  rates  was  secured,  useful 

statistics  were  collected,  the  relations  of  the  railroads 
to  one  another  were  improved  in  various  ways,  while 
the  investigations  and  recommendations  of  the  commis- 
sion tended  in  a  number  of  directions  to  secure  a  better 
adjustment  of  railway  charges.  Then,  too,  the  entire 
experiment  had  great  educational  value;  and  made  it 
possible  to  see,  more  clearly  than  in  1887,  a  way  out  of 
some  of  the  problems  presented  by  federal  railway  regu- 
lation. 

§  152.  In  1906  Congress  enacted  another  important 
law  which  greatly  strengthened  and  enlarged  the  govem- 
Theactof  Hicnt's  control  over  railroads.  This  statute 
'9°^-  placed    express   companies,    sleeping-car  com- 

panies, private-car  lines,  and  pipe  lines  under  the  control 
of  the  Interstate  Commerce  Commission.  Then  it 
prohibited  free  passes  and  made  it  a  misdemeanor  for 
any  road  to  give,  and  any  shipper  to  accept,  "any  rebate, 
concession,  or  discrimination."  It  further  prohibited 
a  railroad  from  transporting  any  article,  except  lumber, 
that  had  been  mined,  manufactured,  or  produced  by 
itself;  with  a  view  to  preventing  carriers  from  monopo- 
lizing certain  industries,  such  as  coal  mining,  in  which 
certain    roads   had    embarked.     Most   important   of   all 


PUBLIC  CONTROL  OF  RAILROADS 


22"; 


was  a  further  provision,  that  the  Interstate  Commerce 
Commission  shall  hereafter  have  power  to  "determine 
and  prescribe"  what  is  a  "just  and  reasonable  rate"  for 
a  carrier  to  charge.  Finally,  the  commission  was  given 
enlarged  powers  to  secure  uniform  and  honest  account- 
ing, as  well  as  to  enforce  greater  publicity  and  stability 
of  rates. 

The  law  of  1906  fared  much  better  in  the  courts  than 
the  act  of  1887,  even  though  the  "commodities  clause," 
which  prohibited  roads  from  transporting  T^e  working 
commodities  produced  by  themselves,  was  ofti>isact. 
greatly  weakened  by  a  decision  that  ownership  of  stock 
of  a  company  mining  coal  does  not  give  the  carrier  road 
such  an  interest  in  the  coal  as  the  law  prohibits.  Not- 
withstanding this  decision  the  commodities  clause  has 
checked  the  tendency  of  railroads  to  enter  various  indus- 
tries foreign  to  their  proper  sphere  as  carriers. 

In  1910  the  "Mann-Elkins  Act"  extended  still  further 
the  powers    of    the    Interstate   Commerce   Commission. 
It  provided  that   changes   in   rates  proposed 
by  railroads  may  be  suspended  by  the  com-  ofigioand 
mission,    pending   investigation    of  their   rea- 
sonableness, and  placed  upon  the  carriers  the  burden  of 
proof   of    the    reasonableness   of   such    changes.     Under 
this  power  the  commission  suspended    and    finally  dis- 
approved certain  general  advances  in  freight  rates  pro- 
posed in  1910.     A  second  important  provision  of  the  act 
gave  new  vitality  to  the  long-  and  short-haul  clause  of 
the  law  of  1887.     The   interj)retati()n   placed   upon   this 
clause  by  the  courts  had  practically  nullified  it,  and  \-ari- 
ous  Southern   and   WcsUrn   States  had   long  complained 


228  RAILROAD   TRANSPORTATION 

of  discriminations  that  favored  producers  and  shippers 
in  the  larger  cities  and  manufacturing  districts  of  the 
East,  who  enjoyed  exceptionally  low  rates  on  long  hauls. 
Accordingly  the  new  law  struck  out  of  the  act  of  1887 
the  proviso  that  the  clause  should  apply  only  to  hauls 
made  under  "substantially  similar  circumstances  and 
conditions,"  and  so  made  the  prohibition  absolute.  It 
then  provided  that  the  Interstate  Commerce  Commission 
may  permit  carriers  to  charge  more  for  short  than  for 
long  hauls,  thus  placing  upon  that  body  responsibility 
for  deciding  some  of  the  most  delicate  questions  of  rate- 
making,  which  involve  conflict  of  both  sectional  and  in- 
dustrial interests.  A  final  provision  created  a  Commerce 
Court  to  review  orders  issued  by  the  Interstate  Commerce 
Commission,  with  the  purpose  of  securing  more  expedi- 
tious and  satisfactory  adjudication  of  such  matters. 
In  1 913,  with  a  view  to  securing  information  needed  for 
the  purpose  of  determining  the  reasonableness  of  rates, 
Congress  supplemented  previous  legislation  by  an  act 
providing  for  an  official  valuation  of  the  railroad  prop- 
erties of  the  country. 

§  153.  Federal  control  of  private  corporations  engaged 
in  interstate  transportation  has  presented,  and  still  offers, 
National  ^^  many  difficulties  that  national  ownership 
ownership.  ^^^  operation  of  railroads  have  been  proposed. 
It  is  argued  that  the  country  has  already  been  parceled 
out  among  a  few  large  systems,  so  that  the  work  of  organr 
izing  the  business  upon  a  national  scale  has  already  been 
largely  accomplished  ;  and  it  is  believed  that  public  owner- 
ship offers  in  this  field  all  the  advantages  that  are  claimed 
for  it  in  the  case  of  municipal  industries  (§  122).    On  the 


PUBLIC  CONTROL   OF  RAILROADS  229 

other  hand,  purchase  of  the  raihvays  would  involve  se- 
rious risks,  since  it  would  require  an  investment  of  some 
$i5,ocxD,ooo,ooo,  while  the  pressure  of  the  employees  for 
high  wages  and  of  the  public  for  low  charges  might  make 
the  financial  results  very  uncertain.  Then,  too,  it  would 
add  more  than  a  million  men  to  the  existing  body  of 
federal  employees;  and,  even  if  civil  service  regulations 
should  be  enforced,  there  would  exist  here  a  formidable 
army  of  voters  for  whose  support  the  politicians  would 
bid,  as  they  appeal  now  to  the  holders  of  military  pen- 
sions. Finally,  enormous  difficulties  would  probably  arise 
in  the  adjustment  of  rates  and  the  extension  or  improve- 
ment of  facilities.  In  the  matter  of  rates,  each  section 
has  interests  that  conflict  with  those  of  other  sections, 
while  similar  conditions  arise  between  industry  and  in- 
dustry; and  in  asking  for  new  and  improved  facilities, 
the  same  jobbery  would  appear  that  to-day  attends  con- 
gressional appropriations  for  rivers  and  harbors  or  the  ex- 
tension of  rural  free  delivery  routes.  Then,  too,  it  is  not 
probable  that  the  railway  service  would  continue  to  be  as 
efficient  as  it  is  at  present,  or  that  the  adjustment  of  rates 
would  be  elastic  enough  to  meet  the  needs  of  business.^ 

FOR   SUPPLEMENTARY   STUDY 

General:     Hadley,     Economics,     153-158,     171-179,    398-400; 

Taussig,  Principles  of  Economics,  II,  363-396. 
Special:     Hadley,    Railroad    Transportation,    1-124,    236-258; 

Johnson,  Railway  Transportation,  213-304,  349-407. 

'  During;  the  Great  War  the  federal  government  took  ovex  the  opera- 
tion of  the  railroads,  hut  under  unusu:d  circumstances  which  perhaps 
did  not  permit  a  satisfactory  test.  .At  the  time  of  writing  it  seems 
pit>bablc  that  the  government  will  relinquish  control. 


CHAPTER  XI 


INTERNATIONAL   TRADE 


1    The  Foreign  Trade  of  the  United  States 


Growth  of 
our  foreign 
trade. 


§  154.  When  our  present  government  was  establishedi 
the  whole  foreign  trade  of  the  United  States  amounted  to 
something  less  than  $40,000,000;  by  i860  it  had 
grown  to $687,000,000  a  year,  and  in  1892,  break- 
ing all  previous  records,  it  had  risen  to  some- 
thing over  $1,800,000,000.  Since  the  last  date  our  foreign 
commerce  has  continued  to  expand  until  at  the  present 
time  it  is  valued  at  $3,576,500,000.  Ordinarily  exports 
from  the  United  States  exceed  the  goods  imported  from 
other  countries,  so  that  the  balance  of  trade  is  said  to  be 
"favorable";  and  of  late  years  the  excess  of  exports  has 
greatly  increased,  having  ranged  from  $300,000,000  to 
$600,000,000.^ 

1  The  movement  of  our  foreign  trade  just  before  the  Great  War  is 
shown  by  the  following  table  :  — 

Foreign  Trade  of  United  States  from  1910  to  1914  (Inclusive) 


Year 

Exports 

Imports 

Total 
Foreign  Trade 

Excess  of 
Exports 

1910  .     .     . 

1911  .     .     . 

1912  .      .     . 

1913  .     .     . 
191^  .      .     . 

$1,744,984,000 
2,049,320,000 
2,204,322,000 
2,465,884,000 
3,364,579.000 

$1,556,947,000 
1,527,226,000 
1,653,264,000 
1,813,008,000 
1,843,925,000 

$3,301,932,000 
3.576,546,000 

3,857,587,000 
4,278,892,000 
4,258,504,000 

$188,037,000 
522,094,000 
551,057,000 
652,475,000 
470,653,000 

230 


FOREIGN  TRADE  OF  THE  UNITED  STATES      231 

The  principal  exports  from  the  United  States  have 
always  been  agricultural  products,  although  in  recent 
years  the  proportion  of  manufactured  goods 
has  steadily  increased.  In  1914  the  country 
exported  $165,302,000  of  breadstuffs,  8610,475,000  of 
cotton,  and  $146,227,000  of  meat  and  dairy  products,  as 
well  as  $61,453,000  of  tobacco  and  $5,803,000  of  live 
animals.  Among  the  exports  of  manufactured  goods,  iron 
and  steel  products  held  first  place,  sho\\ang  an  aggregate 
value  of  $251,480,000 ;  and  mineral  oils  came  third,  with 
a  value  of  $145,361,000.  Copper  ingots  and  manufactures 
of  copper  supplied  $146,222,000  of  the  exports,  cotton 
manufactures  $51,467,000,  and  leather  wdth  its  various 
products  $57,566,000.  From  1893  to  1914  manufactured 
exports  steadily  rose  from  $158,000,000  to  81,099,100,000. 

Our  imports  consist  mainly  of  food  products  and  raw 
materials  that  we  are  unable  either  to  raise  at  all,  or  to 
produce  in  sufHcient  quantity  to  meet  the  demand.  Sugar 
was  imported  in  1914  to  the  value  of  $101,649,- 
000,  and  coffee  to  the  amount  of  $110,725,000; 
while  imports  of  wool  and  of  vegetable  fibers  equaled 
8107,000,000,  imports  of  raw  silk  stood  at  $100,930,000, 
those  of  chemicals  and  dyes  at  $88,039,000,  and  of  India 
rubber  at  $76,162,000.  Imports  of  manufactured  goods 
ready  for  consumption  amounted  in  1914  to  no  more 
than  $408,178,000  out  of  total  imports  of  $1,893,000,000, 
the  largest  ever  known  in  the  history  of  the  country. 

§  155.  It  is  interesting  to  study  the  distril)ution  of  our 
foreign  trade  among  the  various  countries  with  which  we 
have  dealings.  Of  our  exports,  no  less  than  62.8  per 
cent  went  to  Europe  in  19 14,  and  about  14  per  cent  to 


232  INTERNATIONAL   TRADE 

Canada,  leaving  less  than  one  fourth  of  the  trade  to  be 

transacted  with  South  America,  Asia,  and  Africa.     In 

Europe,  moreover,  40  per  cent  of  the  sales 

with  various  were  made  to  Great  Britain  and  Ireland ;  while 

countries.  111  .  _, 

Germany  bought  about  23  per  cent  of  our  Eu- 
ropean exports,  and  France  and  Holland  about  18  or 
19  per  cent.  It  appears  that  Great  Britain,  Germany, 
Canada,  France,  and  Holland  purchased  in  1914  about 
$1,555,000,000  of  the  $2,364,000,000  of  goods  exported 
from  the  United  States.  In  contrast  to  this  condition, 
our  import  trade  is  far  more  widely  distributed.  About 
47  per  cent  of  the  imports  of  1914  came,  indeed,  from  Eu- 
rope ;  but  this  is  a  far  smaller  proportion  than  was  shown 
by  our  European  exports.  Twenty- three  per  cent  of  the 
imports  came  from  Canada  and  Central  America,  1 2  per 
cent  from  South  America,  and  15  per  cent  from  Asia; 
Africa  and  Oceanica  accounted  for  the  remaining  3  per  cent. 
The  reason  for  the  unequal  distribution  of  exports  and 
imports  is  not  hard  to  discover.  Europe  needs  enormous 
^      amounts  of  our  breadstuffs  and  meat  in  order 

Reasons  for 

its  present      to  feed  her  large  population,  and  draws  heavily 

distribution.  o    r-    r-  ;  j 

upon  our  southern  states  for  the  materials  used 
by  her  cotton  manufacturers ;  while  the  United  States  has 
no  such  urgent  need  for  the  manufactured  and  other 
products  that  Europe  has  to  offer.  On  the  other  hand,  the 
sugar,  tea,  coffee,  wool,  hemp,  India  rubber,  and  other  sup- 
plies which  this  country  is  obliged  to  procure  from  foreign 
sources  must  be  sought  chiefly  in  tropical  lands  or  the  less 
thickly  inhabited  parts  of  the  globe.  So  far  as  the  United 
States  and  Europe  are  concerned,  it  is  clear  that  her 
necessity  is  greater  than  ours  ;  and  that  we  possess,  there- 


THE  NATURE  OF  INTERNATIONAL   TRADE    233 

fore,  a  material  advantage  in  trade.  This  fact  has  some- 
times encouraged  Americans  to  boastful  assertions  of  their 
superiority  and  to  reckless  disregard  of  the  interests  of  the 
nations  who  are  our  best  customers;  it  should  rather  lead 
us,  by  a  fair  and  considerate  policy,  to  cultivate  the  good 
will  of  the  countries  which  now  purchase  so  large  a  part 
of  the  surplus  products  of  cur  farms,  workshops,  and 
factories. 

II.  The  Nature  of  International  Trade 

§  156.  Merchants  sell  goods  in  foreign  countries  01 
import  them  from  such  lands  whenever  differences  between 
domestic  and  foreign  prices  make  it  profitable  Foreign  trade 
to  do  so.  The  individual  exporter  or  importer  ^®  ^^^"^"^ 
looks  upon  his  transactions  as  exchanges  of  goods  for 
money,  or  money  for  goods,  as  the  case  may  be;  and, 
from  his  point  of  view,  international  trade  consists  of  the 
exchange  of  commodities  for  money.  Yet  the  matter  is 
not  so  simple  as  this,  and  the  truth  is  that  foreign  commerce 
is  a  process  of  barter  in  which,  for  the  most  part,  exports 
pay  for  imports. 

This  is  a  hard  saying  for  many  persons,  and  it  is  desirable 
to  present  a  few  facts  which  prove  its  truth  beyond  all  pcr- 
adventure.  From  1821,  when  figures  of  specie  statistical 
exports  and  imjK)rls  are  first  available,  down  ''^°'' ' 
to  1896,  the  total  movement  of  merchandise  to  or  from  the 
United  States  aggregated  more  than  $53,000,000,000; 
while  the  total  shipments  of  gold  and  silver  amounted 
to  less  than  $5,000,000,000.  For  the  last  generation  gold 
has  been  the  money  used  in  international  payments;  and 
therefore  a  considerable  part  of  the  silver  included  in  the 


234 


INTERNATION'AL   TRADE 


figures  of  the  specie  movement  should  be  regarded  as 
merchandise  rather  than  as  money.  For  the  five  years 
ending  in  191 1  the  aggregate  shipments  of  merchandise 
and  gold  (exported  and  imported)  have  been  as  follows :  — 


Year 

Merchandise 

Gold 

1907        . 
1908 

1909        . 

1910 

1911 

$3,315,000,000 
3,055,000,000 
2,974,000,000 
3,301,000,000 
3,576,000,000 

$165,900,000 

220,700,000 

135,500,000 

161,900,000 

96,100,000 

$16,221,000,000 

$780,100,000 

It  appears  that  exports  and  imports  of  gold  averaged  no 
more  than  4.8  per  cent  of  the  aggregate  shipments  of  mer- 
chandise, and  that  over  95  per  cent  of  our  foreign  trade 
occasioned  no  payments  in  money. 

§  157.  The  first  explanation  of  this  fact  is  that,  in  for- 
eign trade,  as  in  domestic,  it  is  inconvenient  and  expensive 
This  fact  to  handle  money  when  some  instrument  of 
eip  ained.  qx^^xX.  can  be  made  to  do  the  work  of  exchange. 
Bills  of  exchange,  therefore,  are  used  in  the  larger  number 
of  international  payments,  and  money  is  employed  only 
in  the  settlement  of  balances.  If  imports  exceed  exports, 
gold  may  be  exported  to  pay  for  the  unfavorable  balance 
of  trade,  while  an  excess  of  exports  may  bring  gold  into 
the  country;  but,  in  the  larger  proportion  of  cases,  goods 
shipped  in  one  direction  provide  the  credits  used  in  set- 
thng  for  commodities  that  move  in  the  other. 

But  there  is  an  underlying,  and  more  important,  reason 


THE  NATURE  OF  INTERNATIONAL   TRADE     235 

for  the  fact  that  money  is  httle  used  in  international  trade, 
Shipments  of  money,  whether  outward  or  inward,  tend  ta 
affect  the  general  level  of  prices  and  to  limit  themselves  au- 
tomatically to  comparativelv  small  proportions. 

.  ^  Movements 

An  outflow  of  money  in  payment  of  an  excess  of  money  are 

P  .  ,  ,  .       .        ,      .  automatic. 

of  imports  decreases  the  currency  m  circulation, 
and  tends  to  lower  prices.  Such  a  change  in  conditions 
makes  the  country  a  poor  market  for  foreign  products, 
while  at  the  same  time  it  decreases  the  cost  of  producing 
domestic  products;  and  the  result  is  that  imports  will 
tend  to  decrease,  and  exports  to  expand.  The  change  in 
the  movement  of  trade  effected  in  this  manner  must  con- 
tinue until  the  balance  ceases  to  be  unfavorable,  when 
gold  shipments  will  cease  of  their  own  accord,  since  exi)orts 
now  balance  imports.  On  the  other  hand,  an  excess  of 
exports  which  brings  money  into  a  country  tends  to  raise 
prices,  to  check  purchases  made  by  foreigners,  and  to 
increase  sales  of  foreign  products.  As  soon  as  these 
results  have  been  produced,  exports  and  imports  of  com- 
modities must  tend  to  an  equiHbrium,  and  the  inflow  of 
money  will  come  to  an  end. 

§  158.  In  the  foregoing  discussion  it  has  been  assumed 
that  the  only  financial  transactions  between  countries  are 
those  occasioned  by  the  purchase  of  merchan- 

^  *  International 

disc  and  the  payments  made  on  this  account,  movements oi 
The  fact  is,  however,  that  many  operations  arc 
constantly  carried  on  which  afTect  our  problem.  In  the  first 
place  the  older  and  richer  nations  of  Europe  have  invested 
considerable  capital  in  foreign  countries,  England,  in  partic- 
ular, having  made  enormous  investments  in  all  parts  of  the 
globe.     When  such  a  transaction  occurs,  the  investor  or 


236  INTERNATIONAL   TRADE 

lender  must  remit  the  amount  of  his  investment;  but 
thereafter  the  borrower  must  remit  the  interest  charges. 
In  this  manner  a  country  is  at  first  a  debtor  for  the  capita! 
which  its  citizens  invest  abroad,  and  is  thereafter  a  cred- 
itor for  the  annual  interest  payments.  Each  year  England 
has  credits  for  some  hundreds  of  millions  of  dollars  of 
interest  money;  while  the  United  States,  a  younger  coun- 
try which  has  received  perhaps  $6,500,000,000  of  foreign 
capital,  is  a  debtor  for  interest  on  such  capital. 

Particularly  important  in  influencing  the  course  of  the 
foreign  exchanges  are  the  movements  of  the  capital  of  inter- 
national bankers.     If  the  discount  rates  in  New 

Movements 

of  banking  York  and  London  are  low  while  they  happen 
to  be  high  in  Paris,  the  international  banking 
houses  will  ship  a  part  of  their  capital  to  the  latter  city 
in  order  to  take  advantage  of  the  better  terms  which  the 
money  can  command.  Sometimes,  when  a  country  is  a 
debtor  on  other  transactions  and  would  normally  begin 
to  export  gold,  a  rise  in  the  interest  rates  will  induce 
foreign  creditors  to  invest  the  amounts  due  them  instead 
of  calHng  for  instant  remittance.  In  this  manner,  by 
offering  a  high  rate  of  interest,  a  country  can  frequently 
borrow  funds  which  must  otherwise  have  been  sent  abroad 
in  order  to  satisfy  a  balance  of  indebtedness. 

Other  international  debts  are  incurred  for  ocean  freights. 
A  country  must  meet  in  some  way  the  cost  of  carrying 
Ocean  its  imports ;   and,  unless  its  own  ships  perform 

freights.  i^j^jg  work,  foreigners  must  be  paid  for  the  serv- 
ice. On  the  other  hand,  if  a  country's  ships  carry  ex- 
ports to  foreign  lands,  they  will  earn  considerable  sums 
that  must  be  paid  by  foreigners.    England,  besides  hand- 


THE  NATURE  OF  INTERNATIONAL   TRADE    237 

ling  most  of  her  imports  in  her  own  vessels,  does  a  large 
amount  of  carrying  for  other  countries,  with  the  result 
that  she  is  each  year  a  creditor  for  the  amount  of  the 
earnings  of  her  merchant  marine.  The  United  States, 
however,  imports  but  few  goods  in  American  ships,  and 
earns  little  by  carrying  goods  for  other  countries;  so 
that  it  is  regularly  a  debtor  for  some  $20,000,000  or 
830,000,000. 

Again,  persons  who  travel  abroad  make  expenditures 
which  must  affect  the  condition  of  the  exchanges.  The 
United  States  in  recent  years  has  incurred  Travelers' 
large  debts  for  the  sums  spent  by  American  expenditures, 
tourists  in  excess  of  what  foreigners  have  expended  in 
this  country.  At  the  present  time,  this  item  must  amount 
to  fully  8170,000,000;  while  remittances  by  immigrants 
to  relatives  and  friends  in  foreign  countries  were  esti- 
mated at  $150,000,000  in  1910.  Other  factors  still  might 
be  enumerated,  but  we  have  space  to  mention  only  one. 
London  serves  as  a  world's  clearing  house  for  the  settle^ 
ment  of  international  debts,  and  the  bankers  of  that  city 
receive  each  year  considerable  sums  for  this  and  similar 
services. 

The  net  result  of  all  these  factors  is  that  Great  Britain 
is  a  creditor  nation,  and  receives  annually  enormous  crcdita 
for  interest  on  her  foreign  investments,  freights 

"  Conclusions. 

earned  by  her  ships,  and  the  services  rendered 
by  London  bankers.     In    191 1   her  imports  aggregated 
£680,559,000  and  her  exports  £557,003,000,  the  unfavor- 
able balance  of  trade  amounting  to  £123,556,000.     The 
vast  excess  of  imports  represented  the  various  debts  that 


238  mTEkmttOl^AL  TRADE 

other  countries  owed  her,  and,  in  spite  of  it,  imports  of  spe- 
cie exceeded  exports  by  ;^6,ooo,ooo.  On  the  other  hand, 
the  United  States  in  191 1  exported  goods  to  an  amount 
that  exceeded  by  $522,094,000  the  imports  brought  in  from 
other  lands,  and  imported  only  $32,200,000  of  specie  in 
excess  of  what  was  exported.  The  favorable  balance  of 
trade  represented  chiefly  the  balance  of  obligations  in- 
curred for  the  various  invisible  elements  *  that  enter  into 
the  foreign  exchanges.  Great  Britain,  Germany,  France, 
Holland,  Belgium,  and  Italy  ordinarily  have  unfavorable 
balances  of  trade ;  while,  besides  the  United  States,  Russia, 
Argentine  Republic,  Canada,  Egypt,  and  Mexico  show  an 
excess  of  exports.  The  former  countries  are  creditors  of 
the  rest  of  the  world,  and  receive  their  annual  dues  in  the 
form  of  an  excess  of  imported  merchandise ;  the  latter  are 
debtors  and  must  send  out  an  excess  of  exports  in  order 
to  meet  their  foreign  obligations. 

§  159.   It  was  once  thought  that  the  object  of  foreign 

trade  should  be  to  secure  a  large  favorable  balance,  which 

should  bring  money  into  a  country;   and  for  a 

the  balance      long  time  the  various  nations  of  Europe  regu- 

of  trade.  ^  .  i  r  •    •      • 

lated  commerce  m  a  number  01  mjunous  ways, 
endeavoring  to  make  their  exports  exceed  imports.  Thus 
arose  the  theory  of  the  balance  of  trade  which  controlled 
the  commercial  policy  of  the  w^orld  until  Adam  Smith  and 
writers  of  less  note  demonstrated  its  absurdity.  Look- 
ing upon  commerce  as  an  exchange  of  products  useful  to 
both  parties,  Smith  showed  that  the  restrictions  enforced 

'  During  the  Great  War  the  United  States  bought  back  securities  owned 
in  Europe  and  made  foreign  loans.  We  shall  hereafter  receive  about  $500,- 
000,000  in  interest,  thus  fundamentally  changing  the  future  course  of  trade. 


THE  NATURE  OF  /NTERNATIONAL    TRADE    239 

by  governments  had  the  effect  of  preventing  mutual  serv- 
ice; and  at  the  same  time,  he  pointed  out  that  money 
would  inevitably  be  distributed  over  the  world  in  the  pro- 
portions required  by  the  trade  of  each  country,  and  that 
one  nation  could  not  hope  to  secure  and  retain  more  than 
its  proper  quota.  Since  his  day  economists  have  ceased 
to  worry  over  the  imaginary  evils  of  an  unfavorable  bal- 
ance of  trade. 

§  160.  Having  grasped  firmly  the  proposition  that  in- 
ternational trade  is  in  its  essence  barter,  w^e  may  proceed  to 
a  second  principle  which  relates  to  the  direction  international 
that  this  trade  may  take.  Within  any  small  area,  trade  based 

•'  •  "^  upon  relative 

capital  and  labor  will  migrate  freely  to  the  local-  advantages 

.  '  ,         .  of  production. 

ities  that  afford  the  best  facilities  for  conducting 
any  industry;  and  production  will  be  localized  in  those 
districts  which  offer  the  greatest  advantages  for  raising  or 
manufacturing  each  commodity.  When  exchange  begins, 
each  community  will  sell  the  things  that  it  can  produce 
with  the  smallest  absolute  expenditure  of  labor  and  capital 
for  the  things  in  which  other  communities  have  the  advan- 
tage; while  if  any  district  is  outstripped  by  some  other  in 
the  production  of  every  commodity,  it  will  be  deserted 
gradually  by  laborers  and  capitalists,  and  its  industries  will 
disappear.  Within  a  small  area,  therefore,  commerce  will 
be  based  on  the  absolute  advantages  which  each  community 
possesses  for  the  production  of  various  commodities;  and 
all  articles  will  be  produced  in  the  places  that  can  supply 
them  with  the  smallest  outlay  of  labor  and  capital.  But 
capital  anrl  labor  do  not  move  with  perfect  freedom  from 
country  to  country;  for  distance,  differences  in  language 
and  religion,  and  varying  customs  and  political  institutions 


240  INTERNATIONAL   TRADE 

all  stand  in  the  way.  Although  modern  conditions  have 
facilitated  the  process  of  migration,  it  is  true,  neverthe- 
less, that  only  a  part  of  the  surplus  labor  and  capital  of 
older  countries  finds  its  way  into  other  lands;  and  that 
the  people  of  each  nation  are  content  to  make  the  best  of 
such  resources  as  they  have  rather  than  expatriate  them- 
selves. For  this  reason,  it  will  appear  that  international 
commerce  is  based  upon  relative,  not  absolute,  advantages 
of  production. 

By  an  absolute  advantage  is  meant  the  ability  to  produce 
a  commodity  with  the  smallest  expenditure  of  capital  and 
Relative  ad-  labor.  One  country  might  conceivably  have  an 
JurtiTef  a)n-  absolute  advantage  over  another  in  every  branch 
sidered.  qJ  productive  industry.     A  relative,   or  com- 

parative, advantage,  however,  exists  only  in  relation  to  or 
comparison  with  some  other  industry  or  industries  in  the 
same  country.  Thus  the  United  States  might  have  an 
absolute  advantage  of  fifty  per  cent  over  England  in  the 
production  of  wheat,  one  of  thirty  per  cent  in  mining  iron 
ore,  and  one  of  twenty  per  cent  in  the  manufacture  of 
steel  billets ;  in  such  a  case  American  wheat  raisers  would 
have  a  comparative  advantage  over  American  producers 
of  iron  ore  and  steel  rails,  while  our  iron  miners  would 
have  a  comparative  advantage  over  manufacturers  of 
steel.  Now,  if  no  other  factor  entered  into  the  case,  the 
labor  and  capital  of  both  countries  would  be  most  effi- 
ciently employed  if  the  United  States  specialized  in  the 
production  of  wheat,  and  Great  Britain  in  that  of  steel; 
and  this  is  the  manner  in  which  things  would  work  them- 
selves out  in  the  trade  between  the  two  nations. 

This  can  be  explained  most  readily  by  assuming  that 


THE  NATURE  OF  INTERNATIONAL   TRADE     24! 


two  countries,  say  England  and  the  United  States,  produce 
eight  and  onlv  eisrht  commodities;    and  that 

°  '  .  Illustration. 

when    commerce    begins    between    them,    the 

eight  articles  are  selling  for  the  following  prices  in  each 

country :  ^  — 


Commodities 

Prices  in 
England 

Prices  in 
United  States 

One  ton  steel  rails  . 

$14.00 

$20.00 

One  pound  wool 

•15 

.20 

One  yard  carpet 

1.20 

200 

One  yard  cotton  cloth 

.12 

•15 

One  bushel  wheat  . 

.90 

.60 

One  bushel  corn 

.70 

•50 

One  pound  leather  . 

.20 

•15 

One  pound  pork 

•15 

.07 

Under  the  conditions  here  represented,  American  mer- 
chants will  find  a  profit  in  importing  the  first  four  commod- 
ities from  England,  and  in  exporting  to  that 

'=>  '  .  Conclusions. 

countr}'  the  last  four  articles  on  the  list.  Trade 
may  proceed  for  a  time  upon  this  basis  until  at  last  it 
appears  that,  at  the  existing  scale  of  prices,  exports  and 
imports  cannot  remain  equal  in  volume.  If,  then,  an 
excess  of  imports  develops,  the  United  States  will  begin 
to  export  gold  to  England  in  order  to  settle  an  unfavorable 
balance  of  trade.  The  movement  of  specie  must  continue 
until  prices  fall  in  this  country  and  advance  in  the  other 

*  Assuminfj  that  these  are  the  normal  [)rices  established  by  competition, 
it  wouM  ai)j)ear  that  Kngiand  had  an  absolute  advantafje  over  the  United 
States  in  the  profluction  of  the  first  four  articles;  and  that,  with  the  lasl 
four,  the  ab3(jlute  afivantage  lay  with  the  United  States. 


?42 


rNTERNATIOMAL   TRADE 


sufficiently  to  change  the  currents  of  trade  and  establish 
an  equilibrium  between  exports  and  imports. 

We  may  suppose,  for  instance,  that  the  exportation  of 
gold  to  England  continues  until  prices  advance  twenty  per 
Further  iiius-  Cent  in  that  country  and  fall  in  corresponding 
tration.  degree  in  the  United  States.     After  this  occurs, 

the  prices  of  the  eight  commodities  will  stand  as  follows 
in  the  two  countries :  — 


Commodities 

English 
Prices 

American 
Prices 

Steel  rails         .... 

$16.80 

$16.00 

Wool 

. 

.18 

.16 

Carpet      . 

1.44 

1.60 

Cotton  cloth 

.144 

.12 

Wheat     . 

1.08 

48 

Corn 

.84 

40 

Leather    . 

.24 

.12 

Pork 

.18 

.056 

Obviously,  at  the  new  level  of  prices,  no  profit  could  be 
made  on  the  goods  which  England  formerly  sold  to  the 
United  States,  with  the  exception  of  carpets;  while  the 
margin  of  profits  on  exports  of  American  wheat,  corn, 
leather,  and  pork  would  have  increased  to  an  enormous 
extent.  In  fact,  there  might  now  be  a  profit  in  exporting 
wool  and  cotton  cloth  to  England,  since  the  differences  in 
prices  would  probably  more  than  cover  the  cost  of  transpor- 
tation. The  result  would  be  that  imports  from  England 
would  fall  to  small  proportions,  while  exports  from  the 
United  States  would  be  largely  increased. 
In  this  case  we  have  assumed  a  small  number  of  com' 


TM^  SfAtURE  OF  mtERhrATtO^AL  TRADE    24.'^ 

modities  and  a  much  greater  change  of  prices  than  could 
hold  true  of  actual  traffic  between  the  two  countries,  but 
the   principle   is  valid  with    10,000  articles  of 

.  .  .  ,    Summary.       j 

commerce  and  with  slight  changes  in  the  general 
level  of  prices.  The  permanent  trade  between  England 
and  the  United  States  consists  of  the  exchange  of  products 
in  which  each  country  has  the  greatest  comparative  ad- 
vantages ;  exchange  of  other  goods,  in  which  the  difference 
between  domestic  and  foreign  prices  is  narrowest,  will  be 
intermittent,  falling  to  small  proportions,  or  even  disap- 
pearing, when  slight  changes  in  prices  wipe  out  the  margin 
of  profits.  This,  then,  is  our  second  principle :  in  foreign 
trade  comparative  costs  of  productioji  are  the  determining 
factor. 

§  161.  The  United  States,  of  course,  has  commercial 
relations  with  many  countries  besides  England,  and  our 
statement  of  the  laws  of  trade  needs  to  take  Trade  with 
this  fact  into  account.  In  191 1  our  exports  must  be  "^^ 
to  the  United  Kingdom  were  valued  at  considered. 
$576,000,000,  while  imports  from  that  country  did  not 
exceed  $261,300,000;  with  Germany  our  exports  stood 
at  $287,500,000  and  the  imports  at  $163,200,000.  With 
Cuba,  however,  our  imports  exceeded  exports  by  over 
$49,000,000;  in  the  South  American  trade,  our  excess 
of  imports  aggregated  $73,000,000;  and  with  .\siatic 
countries  the  net  result  was  a  balance  of  imports  amount- 
ing to  over  $r  28,000,000.  In  this  manner  an  excess  of  im- 
ports from  one  country  may  be  offset  by  an  excess  of 
exports  to  another;  and  no  serious  outflow  of  gold  will 
be  occasioned  j^rovided  that,  Li])on  the  whole  volume  of 
transactions,  exports  and  imjxjrts  tend  to  an  equilibrium. 


244  INTERNATIOr^AL   TRADE 

Vhenever  the  equilibrium  is  disturbed,  shipments  of  money 

',  nd  to  change  prices  and  to  equalize  exports  and  imports. 

It  is  necessary,  however,  to  remember  that  many  invisible 

elements  enter  into  the  determination  of  a  country's  p/si- 

Aisothjin-     ^Jon  in  the  international  exchanges.     If  on  fhe 

visible    le-         ^  ^  *-' 

mentsii  the    invisible  accounts  a  country  is  a  debtor,  '.he 

foreign  o^- 

changes.  movement  oi  commodities  must  be  such  a'^  to 
produce  an  excess  of  exports  sufficient  to  pay  the  indf.bted- 
ness ;  and  if  the  country  be  a  creditor,  the  excess  of  iy.i ports 
must  be  sufficient  to  enable  foreigners  to  meet  th?ir  obli- 
gations. Upon  the  whole  volume  of  internationr.l  trans- 
actions, visible  and  invisible,  there  will  be  a  constant 
eq'ialization  of  debit  and  credit  items,  which  \i,  brought 
abvut  chiefly  by  changes  in  the  export  and  im^  irt  of  com- 
modities. For  this  reason  a  favorable  or  unfa  ovable  bal- 
ance of  trade  can  indicate  nothing  more  than  'ho  position 
which  a  country  occupies,  as  debtor  or  creditoi ,  on  account 
of  the  invisible  elements  of  the  exchanges;  it  can  show 
nothing  more  than  that  a  balance  of  exports  c  r  of  impcrts 
is  required  in  order  to  estabhsh  an  equilil  rium  of  in- 
ternational transactions. 

III.  The  Restriction  of  International  T  tide 

§  162,  Foreign  trade  has  always  been  re.  tricted  to  a 
greater  or  less  degree  by  customs  duties  levievl  upon  goods 
Customs  exchanged  between  different  coiititries.  The 
duties.  earlier  method  was  generally  to  i"ipose  a  light 

tax,  of  from  one  to  five  per  cent,  upon  all  imports  and 
exports;  but  the  modern  practice  is  to  levy  heavier  rates 
upon  the  former  and  to  exempt  the  latter  since  export 
duties  tend  to  destroy  ^Jhe  trade  unless  the  ti.';ed  commod- 


RESTRICTION'  OF  INTERNATIONAL   TRADE     24$ 

ity  enjoys  a  monopoly  in  the  foreign  market.  Customs 
duties  may  be  either  specific  or  ad  valorem  according  as 
the  mere  bulk  or  the  value  of  the  commodities  is  made 
the  basis  of  assessment;  thus  the  duty  of  forty  cents  pel 
ton  which  the  United  States  levies  upon  iron  ore  is  specific, 
while  the  tax  on  diamonds  is  ten  per  cent  ad  valorem. 

§  163.  Import  duties  are  sometimes  levied  solely  for 
the  purpose  of  obtaining  revenue  for  the  government. 
When  this  is  the  case,  the  duties  are  not  made  Revenue 
so  high  as  to  restrict  ver}'  greatly  the  amount  of  **"^^- 
goods  imported,  because  such  action  would  result  in  a  loss 
of  revenue.  The  English  tariff  at  the  present  time  aims 
to  tax,  as  far  as  possible,  only  commodities  that  do  not 
come  into  competition  with  the  products  of  home  indus- 
tries; and  whenever  a  duty  is  levied  upon  an  article  that 
is  produced  at  home,  an  excise  tax  of  similar  weight  is 
imposed  upon  the  domestic  product.  The  result  is  that 
the  tariff  gives  no  advantage  to  the  domestic  producer 
and  interferes  as  little  as  possible  with  business  conditionh. 
A  revenue  duty  must  normally  raise  the  price  of  a  com- 
modity by  about  the  amount  of  the  tax,  since  it  is  an  added 
element  in  the  cost  of  placing  the  product  on  the  market. 
English  merchants  who  imported  tea  paid  to  the  govern- 
ment in  1900  the  sum  of  $31,000,000,  and  there  is  no  doubt 
that  the  largest  part  of  this  tax  fell  on  the  consumers. 

§  164.   When  duties  are  laid  upon  imports  without  an 
equivalent    excise   tax   upon    similar   domestic    products, 
the   effect   is   to  give   domestic   producers   an  incidental 
advantage   over   foreign    competitors.     If   the  p^o^'^'^^"'"- 
rates  are  not  raised  above  the  point  at  which  the  largest 
revenue  is  received,  a  tariff  may  be  described  as  a  revenue 


246  INTERNATIONAL   TRADE 

tarilT  that  gives  incidental  protection ;  this  was,  in  general, 
the  character  of  the  tariffs  estabUshed  in  the  United  States 
between  1789  and  181 2. 

But  duties  are  often  raised  above  the  rates  that  yield 
the  largest  revenue,  for  the  purpose  of  cutting  down 
Protective  imports  and  protecting  domestic  producers, 
tariffs.  Every  such  duty  is  purely  protective  in  char- 

acter, and  the  revenue  that  it  may  yield  is  merely  an 
incidental  factor;  indeed,  duties  are  sometimes  made 
so  high  as  to  be  practically  prohibitory,  and  to  reduce 
the  receipts  to  insignificant  proportions.  In  the  United 
States  the  tariff  was  doubled  at  the  outbreak  of  the  War 
of  1812;  and  in  1816,  when  a  new  law  was  enacted,  many 
duties  were  placed  upon  a  distinctly  protective  basis. 
Since  that  date  our  various  tariff  laws  have  usually  been 
drawn  with  a  view  to  extending  a  high  degree  of  protection 
to  domestic  industries.  The  tariff  law  of  1913,  however, 
has  materially  lowered  duties,  and  probably  marks  the 
end  of  the  era  of  high  protection. 

§  165.  The  general  effect  of  a  protective  duty  is  to 
increase  the  cost  of  importing  a  commodity  and  to  encour- 
Generaieaect  ^^^  domestic  labor  and  capital  to  undertake 
»J^P^o^t«ctive  to  produce  it  In  the  United  States  protec- 
tion has  been  invoked  chiefly  for  the  benefit 
of  manufacturing  industries;  but  in  Europe,  at  the  present 
time,  the  principal  object  of  protection  is  to  favor  the 
landed  interests  in  their  competition  with  cheaper  bread-- 
stuffs  and  meats  of  newer  countries.  Concerning  its  ex- 
pediency, pubhc  opinion  has  always  been  divided;  and 
the  economic  questions  at  issue  have  usually  been  com« 
plicated  with  political  considerations.  .  . 


RESTRICTION  OF  INTERNATIONAL   TRADE     247 

§  166.  Approaching  the  problem  first  from  a  purelj 
economic  point  of  view,  and  ignoring  pohtical  considera- 
tions, we  must  observe  that  the  first  effect  of  ^ 

'  _  _  _  Economic 

a  protective  duty  is  not  to  increase  tlie  amount  effects  of 

•      1      1  1       •  protection. 

of  labor  and  capital  that  obtam  employment, 
but  to  divert  a  part  of  a  country's  productive  energy  from 
the  fields  that  it  would  otherwise  have  entered,  and  to 
place  it  in  industries  that  are  favored  by  the  law.  The 
only  exception  occurs  when  a  high  duty  attracts  foreign 
capital  that  would  not  have  come  into  the  country  upon 
other  conditions.  In  the  United  States  a  certain  amount 
of  European  capital  has  been  attracted  in  this  manner,^ 
but  most  of  the  funds  invested  in  American  enterprises 
have  gone  into  railroads  and  other  industries  that  have 
not  been  affected  by  the  tariff;  in  fact,  foreign  capital 
seems  to  seek  the  unprotected  industries  in  preference 
to  the  protected.  In  general,  therefore,  a  protective  duty 
does  not  increase  the  extent  of  a  country's  industry,  but 
merely  changes  its  character. 

The  principal  objection  to  a  protective  duty  is  that  a 
country's  labor  and  capital,  when  left  to  themselves,  find 
investment  in  those  industries  which  offer  the  Diversion  of 


labor  and 


best    advantages,    so    that    protection    diverts  capital  into 
productive  energy  from  more  to  less  profitable  ^u^c^fve  m- 
employment.     This    is    another    hard    saying  dustries. 
which  is  not  accepted  by  most  friends  of  protection,  but 

'  In  1892  it  was  claimed  that  sume  millions  of  f(;reign  capital  had  been 
invested  in  the  tin  plate  and  other  imlustrics  that  had  received  increased 
protection  in  1890.  But  even  when  the  figures  presented  were  accepted 
at  their  face  value,  they  amounted  to  a  very  small  per  cent  of  the  new 
capital  that  is  annually  invested  in  American  manufactures,  to  say  nothing 
of  other  industries. 


248  INTERNATIONAL   TRADc 

its  correctness  is  not  difficult  to  establish.  Our  stuay 
of  the  nature  of  international  trade  shows  us  that  foreign 
products  can  never  come  into  a  country  except  in  exchange 
for  some  equivalent,  because  commerce  is  conducted  for 
profit  and  not  from  motives  of  philanthropy.  Moreover 
we  have  seen  that  imports  cannot  be  bought  solely  by  a 
continued  exportation  of  money,  since  the  outflow  of  gold 
lowers  prices  and  destroys  importers'  profits.  Imports 
must  be  paid  for  chiefly  by  exports  of  commodities,  and 
prices  at  home  and  abroad  will  always  tend  to  a  level 
that  will  permit  the  latter  to  equal  the  former.  Foreign 
competition,  therefore,  can  never  prevent  the  investment 
of  a  country's  labor  and  capital  in  enough  industries  to 
furnish  the  commodities  by  which  payment  is  made  for 
imports. 

Moreover,  in  any  case,  the  bulk  of  the  work  which  a 
nation  requires  to  supply  its  needs  must  be  done  at  home 

and  can,  by  no  possibility,  be  performed  in 
tries  cannot     another  country.     Domestic  services  must  be 

rendered  in  the  household,  professional  call- 
ings must  be  pursued  in  the  country  where  the  patrons 
live,  buildings  must  be  erected  where  they  are  wanted, 
railroad  and  other  transportation  agencies  require  the 
services  of  local  laborers,  while  mercantile  pursuits  call 
for  an  immense  amount  of  labor  that  must  be  performed 
in  the  country.  Then,  such  w^orkmen  as  barbers,  bakers, 
butchers,  laundresses,  hotel  keepers,  gardeners,  hostlers, 
and  the  like,  are  engaged  in  occupations  that  cannot  be 
aflFected  by  foreign  competition.  Only  in  the  field  of 
agriculture,  mining,  and  manufactures  is  it  possible, 
generally  speaking,  to  utihze  the  products  of  foreign  capita] 


RESTRICTION  OF  INTERNATIONAL   TRADE     249 

and  labor  instead  of  those  of  domestic  make;  and  it  is 
only  these  industries  that  can  be  affected  by  a  tariff.  Even 
here  there  is  a  great  deal  of  work  that  foreigners  cannot 
perform,  such  as  that  of  the  cobbler,  the  village  black- 
smith, and  the  wheelwright;  while  bulky  products  such 
as  bricks,  or  perishable  goods  Uke  milk  and  garden  truck, 
cannot  be  procured  from  foreign  countries  except  in  dis- 
tricts adjacent  to  a  frontier.  The  statistics  of  occupations 
collected  by  the  census  disclose  the  fact  that  probably 
more  than  one  half  of  the  people  engaged  in  gainful  occu- 
pations in  the  United  States  are  doing  work  which  could 
not  conceivably  be  protected  by  a  duty  on  imports.  More- 
over, of  the  remainder  who  are  engaged  in  agriculture 
or  manufactures,  it  appears  that  by  far  the  largest  pro- 
portion is  found  in  occupations  that  produce  enormous 
quantities  of  goods  for  export.  In  fact,  when  allowance 
is  made  for  caUings  which  cannot  conceivably  be  affected 
by  foreign  competition,  and  for  agricultural  and  manu- 
facturing industries  in  which  American  producers  have 
a  marked  advantage  over  foreign,  it  becomes  evident 
that  not  more  than  ten  per  cent  of  the  labor  and  capital 
of  the  country  is  in  a  position  to  profit  by  protection. 

Now  if  perfect  freedom  exists,  the  labor  and  capital 
of  any  country  will  flow  first  of  all  into  occupations  in 
which,  from  the  very  nature  of  the  case,  no  ^^ 
foreign   competition   can   be   felt;    or  will   be  of  free  ex- 
invested  in   those  branches  of  agriculture  and 
manufactures  in  which  the  prcvaihng  level  of  prices  makes 
it  profitable  to  produce  goods  both  for  domcslic  use  and 
for  export.     No  competition  by  foreigners  can  ever  alter 
this  fact,   which   assures  to  domestic   labor  and   capital 


250 


INTERNATIONAL   TRADE 


the  amplest  and  most  profitable  employment;  for  the 
industries  in  which  goods  can  be  produced  for  export  are 
precisely  those  for  which  the  country  possesses,  at  the  time 
being,  the  greatest  comparative  advantage.  Therefore 
the  production  of  wealth  will  be  greatest  if  the  energy 
and  enterprise  of  the  people  are  devoted  to  these  branches. 
If  the  labor  of  200  men  and  capital  to  the  amount  of 
$200,000  will  produce  500,000  bushels  of  wheat  or  200,000 
yards  of  cloth  in  the  United  States,  while  in  England 
they  will  produce  300,000  bushels  of  wheat  or  200,000 
yards  of  cloth,  the  former  country,  while  under  no  abso- 
lute disadvantage  in  the  manufacture  of  cloth,  will  have 
a  considerable  comparative  advantage  in  the  production 
of  wheat.  If  no  trade  is  carried  on  between  the  countries, 
and  each  one  divides  its  labor  and  capital  equally  between 
the  two  industries,  England  will  produce  150,000  bushels 
of  wheat  and  100,000  yards  of  cloth;  while  in  the  United 
States  the  figures  will  be  respectively  250,000  and  100,000. 
But  if  the  United  States  invests  all  of  its  labor  and  capi- 
tal in  raising  wheat,  and  England  devotes  itself  exclu- 
sively to  the  production  of  cloth,  the  total  product  of 
the  two  nations  will  be  500,000  bushels  of  the  former 
commodity  and  200,000  yards  of  the  latter.  Thus  we 
?ee  that  the  opening  of  an  unrestricted  trade,  which  would 
have  to  be  based  upon  comparative  advantages  of  pro- 
duction, would  increase  the  aggregate  production  by 
100,000  bushels  of  wheat.^    In  this  way,  therefore,  free- 

1  Sometimes  it  is  objected  that  the  so-called  more  productive  industries 
cannot  afford  a  sufficient  field  for  all  the  labor  and  capital  of  the  country. 
But  it  is  evident  that,  when  labor  and  capital  begin  to  crowd  into  one 
industry  in  such  quantities  that  it  becomes  less  profitable,  investment  will 
Dftturally  begin  in  the  industry  next  in  order  of  advantage.     No  tariff  i« 


RESTRICTION  OF  INTERNATIONAL   TRADE     251 

dom  of  exchange  must  set  the  people  of  each  country  at 
work  upon  the  industries  in  which  their  resources  can 
be  most  advantageously  employed. 

§  167.  So  far  as  the  present  productivity  of  a  nation's 
industry  is  concerned,  there  is  no  answer  to  the  argument 
iust  stated;    but  it  may  be  argued  that  the  „       ^     ^ 

'  '  .       7  .  Present  and 

causes  that  now  make  certain  industries  less  future  effect 

of  protection. 

profitable  than  others  may  be  removed  with 
proper  encouragement,  and  that  it  is  not  desirable  to 
confine  a  people  to  a  few  industries  like  cloth  making 
or  the  production  of  grain.  It  may  be  that  a  few  years 
of  experience  will  enable  entrepreneurs  to  learn  the  best 
methods  of  production,  and  laborers  to  acquire  a  higher 
degree  of  skill,  so  that  the  industry  will  become  as  profita- 
ble as  any  other.  In  such  a  case  the  initial  loss  occasioned 
by  the  establishment  of  a  less  productive  enterprise  will 
come  to  an  end ;  and  the  country  will  have  the  advantage 
of  a  greater  diversity  of  its  industries,  which  will  give  larger 
scope  for  the  development  of  the  various  aptitudes  of  its 
people.  That  such  a  resuh  may  follow  the  establish- 
ment of  a  few  wisely  chosen  industries  by  means  of  pro- 
tective duties  is  generally  conceded  by  economists,  and 
seems  to  be  open  to  no  doubt.  It  should  be  observed, 
however,  that  any  industry  thus  developed  is  necessarily 
one  for  which  the  country  offers  superior  advantages 
provided  that  the  people  learn  how  to  utili/c  them.  The 
effect  of  the  protective  duty,  therefore,  is  merely  to  hasten 
the  establishment  of  enterprises  which  would  have  come 
into  existence  at  some  time  without  such  aid. 

needed  to  establish  a  new  in<luslry  if  an  old  one  bccdines  so  crowded  9i 
to  be  no  longer  mure  profitable  than  the  other. 


2  52  INTERNATIONAL   TRADE 

This  is  the  "infant  industry"  argument  upon  which 
the  earher  protectionists  relied  greatly  in  the  United  States. 
Protect!  n  t  ^^  formulated  in  the  previous  paragraph,  it 
infant  in-        States  what  may  follow  the  imposition  of  pro- 

dustries.  .         ,      . 

tective  duties  upon  the  products  of  a  few  wisely 
chosen  industries;  but  it  does  Hot  describe  the  actual 
working  of  protection  in  all  the  cases  m  which  it  is  appHed 
in  the  United  States  and  elsewaere.  It  is  not  possible 
to  secure  from  Congress  a  tariff  law  which  selects  judi- 
ciously a  few  industries  and  accords  them  temporary 
protection  du'-ng  the  time  that  capital  and  labor  are  over- 
coming the  initial  obstacles.  Every  section  of  country, 
in  fact  every  congressional  district,  will  demand  protec- 
tion for  its  interests;  and  by  the  time  that  any  measure 
emerges  from  the  legislative  mill,  it  is  loaded  down  with 
a  mass  of  objectionable  details  which  have  to  be  incor- 
porated in  order  to  secure  the  votes  necessary  for  its  pas- 
sage. In  this  way  protection  has  been  accorded  unwisely 
to  industries  that  had  no  prospect  of  becoming  self-sus- 
taining within  a  reasonable  time,  and  a  permanent  waste 
of  productive  energy  has  been  the  result.  Moreover, 
the  new  industries,  when  once  established,  have  shown 
no  disposition  to  give  up  the  favors  which  were  accorded 
in  their  infancy;  but  have  fought  to  retain  high  duties 
on  their  products,  even  after  they  have  grown  into  trusts 
and  their  competition  has  come  to  be  dreaded  in  foreign 
markets.  Temporary  protection  to  a  few  wisely  selected 
industries  is  a  policy  that  bears  not  the  remotest  resem- 
blance to  the  course  actually  pursued  by  the  United 
States. 
§  1 68.   It  should  never  be  forgotten  that  so  long  as  a 


HESTRrcrrOM  of  mTER^AT10!^AL  TRADE    253 

duty  Is  needed  to  maintain  an  industry,  protection  is 
causing  a  diversion  of  capital  from  more  to  less  produc- 
tive fields  of  investment.  It  must  also  enhance  xhe  burden  ot 
the  price  paid  by  consumers,  although  not  protection. 
necessarily  by  the  full  amount  of  the  duty.  Protection, 
obviously,  can  be  needed  only  by  an  industry  in  which 
che  domestic  cost  of  production  is  higher  than  the  foreign ; 
::nd  labor  and  capital  would  not  embark  in  such  an  enter- 
prise if  the  duty  did  not  raise  the  price  sufficiently  to  cover 
this  difference.  In  fact,  the  demand  of  the  protectionist 
is  usually  for  a  duty  "high  enough  to  counterbalance 
the  difference  between  the  domestic  and  foreign  cost/' 
or  to  compensate  for  "the  higher  wages  paid  American 
labor."  If  the  domestic  cost  is  ten  per  cent  higher  than 
the  foreign,  a  duty  of  fifty  per  cent  will  raise  the  price 
by  not  more  than  one  tenth  —  provided  that  compel! lion 
exists  between  domestic  producers;  very  often,  however, 
our  manufacturers  have  combined  to  exact  the  last  penny 
permitted  by  the  law'.  Only  when  the  domestic  cost  of 
production  falls  to  the  level  of  the  foreign  can  the  tax 
upon  consumers  come  to  an  end.  At  that  time,  the  duty 
is  no  longer  needed  to  sustain  the  industry,  and  it  should 
be  promptly  repealed  in  order  to  remove  a  powerful  incen- 
tive for  the  formation  of  a  monopoly.  If  this  point  is 
ever  reached,  the  infant  industry  becomes  able  to  stand 
upon  its  own  feet,  and  the  labor  and  capital  invested  in 
it  can  no  longer  be  considered  unprofitably  employed; 
but  up  to  ihis  time,  every  industry  that  requires  protection 
is  supported  at  the  expense  of  the  community,  and  receives 
alms  in  the  form  of  an  addition  to  the  price  thai  consumers 
must  pay. 


2  54  INTERNATIONAL   TRADE 

§  169.  About  1840,  in  discussions  of  the  tariff  question, 
protectionists  began  to  appeal  for  the  support  of  work- 
The  tariff  ingmen  by  arguing  that  import  duties  are 
and  wages.  neccssary  in  order  to  exclude  the  products  of 
cheap  European  labor  and  to  maintain  a  high  rate  of 
wages  in  the  United  States;  and  this  contention  has  ever 
since  played  an  important  part  in  the  debate.  There  is 
no  doubt  that  American  wages  are  generally  higher  than 
those  which  prevail  in  Europe,  and  this  fact  is  now  attri- 
buted to  the  influence  of  our  protective  tariff.  In  consider- 
ing the  vaHdity  of  this  claim,  it  is  important  to  remember 
that  our  higher  rate  of  wages  has  always  existed  in  the 
United  States  from  the  establishment  of  the  first  English 
colonies,  and  that,  prior  to  1789,  there  was  no  national 
tariff  to  which  this  superiority  could  be  attributed. 

In  1723,  for  instance,  an  Enghsh  official  in  the  province 
of  New  York  wrote:  "North  America  containing  a  vast 
Historical  tract  of  land,  every  one  is  able  to  procure  a 
*^**-  piece  of  land  at  an  inconsiderable  rate,  and 

therefore  is  fond  to  set  up  for  himself  rather  than  work 
for  hire.  This  makes  labor  continue  very  dear,  a  common 
laborer  usually  earning  three  shillings  by  the  day;  and 
consequently  any  undertaking  which  requires  many  hands 
must  be  undertaken  at  a  far  greater  expense  than  in  Europe, 
and  too  often  this  charge  only  overbalances  all  the  advan- 
tages which  the  country  naturally  affords,  and  is  hardest 
to  overcome  to  make  any  commodity  of  manufacture 
profitable  which  can  be  raised  in  Europe."  And,  during 
the  early  tariff  controversies,  the  protectionists  never 
thought  of  maintaining  that  protective  duties  caused 
high  rates  of  wages ;   rather  they  argued  that  since  wages 


RESTRICTION^  OF  INTERNATIONAL    TRADE     255 

were  higher  in  the  United  States,  a  tariff  was  needed 
in  order  to  enable  manufacturers  to  establish  new  enter- 
prises and  pay  the  prevailing  rates.  It  could  not  be  argued 
that  the  tariff  was  responsible  for  the  high  general  rate 
of  American  wages  until  the  men  who  remembered  that 
the  higher  wages  were  older  than  the  tariff  had  disappeared 
from  the  scene  of  action. 

Wages  depend,  as  we  shall  learn  in  the  next  chapter, 
upon  the  productivity  of  labor;  and  that  this  must  be 
the  case  will  be  evident  when  one  asks  himself 

Conclusion. 

how,  except  on  condition  that  their  labor  pro- 
duced more  commodities,  the  laborers  of  one  country 
could  possibly  receive  more  than  the  laborers  of  another. 
Such  a  high  rate  of  wages  was  no  obstacle  to  the  estab- 
lishment of  the  industries  in  which  this  country  had  the 
greatest  comparative  advantages,  since  in  such  cases  the 
higher  rate  of  payment  was  offset  by  greater  efficiency. 
It  was  an  obstacle,  however,  to  the  growth  of  industries 
in  which  the  advantages  of  the  country  were  not  so  great ; 
and  it  was  on  this  ground  that  protection  was  deemed 
necessary.  The  tariff  merely  enabled  the  employers  who 
entered  the  less  productive  industries  to  pay  the  prevail- 
ing rates  of  wages,  and  it  did  this  by  imposing  a  tax  upon 
the  consumers.  Undoubtedly,  after  labor  has  been 
diverted  into  a  less  productive  industry,  the  continued 
employment  of  the  persons  so  engaged,  at  the  existing 
rate  of  wages,  is  dependent  u])on  the  duty;  and  it  can 
become  independent  only  when  the  enterprise  has  come  to 
be  self-supporting  and  able  to  produce  as  cheaply  as  for- 
eign competitors.  The  tariff,  then,  did  not  create  and  does 
not  maintain  the  general  high  rate  of  .\mcrican  wages; 


2  56  INTERNATIONAL   TRADE 

but  it  merely  enables  a  small  number  of  laborers  to  find 
employment,  at  prevailing  rates,  in  industries  that  are 
supported  by  taxing  the  rest  of  the  community.  When 
one  considers  that  less  than  ten  per  cent  of  the  labor  force 
of  the  country  is  employed  in  callings  that  are  in  any  way 
dependent  upon  the  tariff,  it  becomes  evident  that  it  is 
absurd  to  suppose  that  any  benefits  accruing  to  such  a 
small  body  of  workers  could  possibly  raise  the  wages  of  the 
remaining  ninety  per  cent  to  a  point  twenty  or  thirty  or 
fifty  per  cent  above  the  level  that  prevails  in  the  various 
parts  of  Europe.^ 

§  170.    In  most  discussions  concerning  the  effect  of  the 
American   tariff,    the   protectionist   assumes   that   manu- 
factures  could  not   have  been  established  in 

Diversifica- 
tion of  in-        the   United    States    without   its    aid;     and    he 

argues  that,  whatever  it  may  have  cost,  pro- 
tection has  had  the  effect  of  diversifying  our  industries. 
This  is  to  claim  more  than  historical  facts  warrant.  In 
the  eighteenth  century,  in  spite  of  unrestrained  English 
competition  and  in  the  face  of  Parliamentary  prohibitions, 
our  people  established  several  important  branches  of 
manufactures.  In  1791,  when  Alexander  Hamilton  made 
his  famous  argument  in  favor  of  protection,  he  could  say, 
at  a  time  when  national  tariff  laws  had  not  existed  long 
enough  to  exert  an  appreciable  influence:  "To  all  the 
arguments  which  are  brought  to  evince  the  impracticability 
of  success  in  manufacturing  establishments  in  the  United 
States,  it  might  have  been  a  sufficient  answer  to  have 

^  That  a  tariff  is  not  needed  to  keep  wages  in  one  country  above  those 
prevailing  in  neighboring  lands  can  be  seen  from  the  fact  that  in  England, 
ttnder  free  trade,  wages  are  higher  than  in  the  rest  of  Europe. 


RESTRICTION'  OF  INTERNATIONAL   TRADE    257 

referred  to  the  experience  of  what  has  been  already  done. 
It  is  certain  that  several  important  branches  have  grown 
up  and  flourished  with  a  rapidity  which  surprises,  affording 
an  encouraging  assurance  of  success  in  further  attempts." 
§  171.  At  the  present  day  the  important  question  is 
not  the  influence  which  the  tariff  has  exerted  in  the 
past,  but  the  policy  which  the  country  should  The  present 
pursue  in  the  future.  In  1909  Congress  revised  situation. 
the  tariff,  but  failed  to  make  such  a  general  reduction 
of  duties  as  the  country  demanded ;  with  the  result 
that  agitation  for  further  reduction  continued,  and  led 
to  the  enactment  of  the  tariff  law  of  191 3.  This  demand 
for  lower  duties  was  caused  in  part  by  the  feeling  that 
many  of  the  duties  were  excessive,  and  that  som.e  of  them 
resulted  in  gross  favoritism  to  particular  industries  and 
afforded  shelter  to  oppressive  monopolies.  Then,  too, 
between  1891  and  191 1,  exports  of  the  products  of  do- 
mestic manufactures  had  increased  from  $188,300,000  to 
$907,500,000;  and  it  had  become  evident  that  our  manu- 
facturers were  turning  their  attention  to  foreign  markets 
to  a  greater  extent  than  ever  before.  Such  manufacturers 
were  learning  that  import  duties  on  raw  materials  ob- 
structed the  development  of  foreign  trade,  and  they  had  at 
the  same  time  developed  their  industries  to  such  a  point 
that  they  needed  to  extend  the  foreign  markets  for  their 
products.  For  these  reasons  the  law  of  191 3  cncountcTcd 
less  opposition  than  such  a  measure  would  have  met 
a  decade  earlier.  If  the  inevitable  readjustments  caused 
by  the  new  tariff  do  not  seriously  disturb  industry  and 
that  law  can  have  a  fair  trial  for  eight  or  ten  years,  it 
will  probably  stimulate  greatly  the  development  of  those 


258  INTERNATIONAL   TRADE 

industries  in  which  the  United  States  has  the  greatest 
comparative  advantages  and  lead  to  marked  increase 
of  our  foreign  trade. 

FOR   SUPPLEMENTARY   STUDY 

General:     Bullock,  Selected    Readings   in    Economics,    453-512 
Hadley,    Economics,   421-445;    Nicholson,    Political   Econ- 
omy, II,  235-328;    Seager,  Introduction  to  Economics,  361- 
384;  Taussig,  Principles  of  Economics,  Bk.  IV. 

Special:  Bastable,  The  Commerce  of  Nations;  Roberts,  Govern- 
ment Revenue;  Shaw,  The  National  Revenues;  Sumner,  Pro- 
tectionism ;  Taussig.  Tariff  History  of  the  United  States. 

QUESTIONS 

1.  It  is  said  that  the  recent  war  has  made  the  United  States 
a  "creditor  nation."  If  this  is  true,  how  will  our  balance  of  trade 
be  affected  ? 

2.  Why  is  international  trade  based  upon  relative  and  not 
absolute  advantages  in  production  ? 

3.  Why  may  a  protective  duty  raise  the  price  of  a  commodity 
by  less  than  its  full  amount  ? 

4.  Has  the  recent  war  thrown  any  new  light  upon  the  de- 
sirability of  granting  protection  to  domestic  industries  ? 


CHAPTER  XII 

THE   DISTRIBUTION  OF   WEALTH 
I.  The  National  Income  and  its  Distribution 

§  172.  The  annual  product  of  a  nation's  industry  is 
obtained  through  the  cooperation  of  vi.rious  classes  of 
persons,  —  employers,  laborers,  landowners,  and  xhe  distrib-- 
capitalists,  —  each  of  which  claims  a  share  of  *'''^  process, 
the  national  income.  Production,  therefore,  must  be 
followed  by  a  process  of  distribution,  in  which  the 
v/ealth  created  each  year  shall  find  its  way  into  the 
hands  of  the  different  recipients.  The  nature  and  re- 
sults of  this  distributive  process  now  demand  careful 
study;  and,  in  considering  them,  we  shall  have  to  deal 
with  some  of  the  most  important  and  difficult  problems 
of  the  science. 

At  the  outset  it  should  be  observed  that  the  annual 
product  of  industry  does  not  constitute  the  whole  of 
a    nation's    income.     Every    society    possesses 

\  •'      ^  Annual  prod- 

a  larger  or  smaller  quantity  of  durable  con-  uctandan 
sumer's  goods,  such  as  dwelling  houses,  books, 
or  pictures,  accumulated  in  the  past,  from  which  it  derives 
each  year  a  considerable  number  of  enjoyments.  All  the 
services  that  are  derived  from  such  possessions  constitute 
a  part  of  the  social  income.  They  accrue,  obviously, 
to  the  owners  of  the  goods;  and  the  manner  in  which 
they  are  distributed  requires  little  further  consideration. 

259 


26o  THE  DISTRIBUTION  OF  WEALTH 

It  may  be  said,  however,  that  laws  regulating  inheritance 
exert,  from  one  generation  to  another,  an  important 
influence  upon  the  distribution  of  this  form  of  social 
income. 

It  is  of  the  division  of  the  current  product  of  the  nation's 

industry  that  tiie  economist  usually  treats  when  he  studies 

the  distribution  of  wealth.     This   consists  of 

Productivity 

limited  by  both  material  goods  and  personal  services 
obtained  from  the  employment  of  labor  and 
capital;  and  it  will  be  meager  or  copious  according  to 
the  energy  and  inteUigence  with  which  production  is 
conducted,  and  the  natural  resources  to  which  the  people 
have  access.  To  a  very  considerable  extent,  also,  the 
productivity  of  current  industry  depends  upon  the  amount 
of  capital  that  producers  have  at  their  command.  Greater 
skill,  a  larger  number  of  laborers,  and  increased  zeal  will 
enable  a  society  at  any  time  to  increase  the  products  at  its 
disposal;  but  there  are  limits  to  such  improvement  of 
the  productivity  of  industry,  arising  from  the  fact  that 
modern  methods  are  conditioned  upon  the  employment 
of  capital.  With  the  steam  engine,  the  blast  furnace, 
and  the  Bessemer  converter,  the  United  States  can  pro- 
duce more  than  15,000,000  tons  of  steel  in  a  single  year; 
but  without  the  aid  of  capital  there  could  be  no  production 
of  this,  or  any  other  metal;  and,  in  order  to  double  the 
product,  a  large  additional  investment  of  capital  would 
be  required.  The  same  thing  is  true,  although  not  always 
to  the  same  extent,  in  the  production  of  most  material 
commodities.  It  is  therefore  evident  that  the  efficiency 
of  modern  industry  is  conditioned,  to  a  very  large  degree, 
upon  the  amount  of  capital  produced  in  past  years  and 


NATIONAL  INCOME  AND  ITS  DISTRIBUTION     261 

available  for  current  use.  In  this  manner  the  present 
IS  hmited  by  the  past,  and  the  amount  of  the  social  income 
is  dependent  upon  past  accumulations  of  capital. 

The  income  of  a  society  is  here  conceived  of  as  a  certain 
amount  of  com_modities  or  services;  but  the  incomes 
which  individuals  draw  from  the  annual  prod-  vaiue  and 
uct  of  industry  must  be  considered  both  as  distribution. 
definite  quantities  of  economic  goods  and  as  definite 
quantities  of  value.  For  in  the  modern  distributive 
process,  the  fundamental  fact  is  that  goods  are  produced 
for  the  market,  and  that  it  is  the  value  of  the  product, 
not  the  product  itself,  that  is  divided  among  the  various 
persons  entitled  to  participate  in  the  proceeds  of  an  enter- 
prise. When  a  farm  is  cultivated  upon  shares,  landowner 
and  tenant  may  divide  a  certain  number  of  bales  of  cotton 
or  bushels  of  wheat;  but  usually  commodities  are  first 
sent  to  market,  and  the  money  secured  from  the  sale  is 
the  source  from  which  individual  shares  are  derived. 
Private  incomes,  therefore,  are  generally  expressed  in 
terms  of  money. 

This  leads  to  a  distinction  which  frequently  is  of  great 
importance.     Private  incomes   may  be  money   incomes, 
i.e.^  definite  sums  of  money;  or  they  may  be 
real  incomes,  which,  of  course,  consist  of  the  money  in- 

...  .  ,  .  comes. 

commodities  and  services  that  money  mcomes 
will  command.  In  a  single  community,  where  the  prices 
of  articles  of  necessary  consumption  are  the  same  for  all 
persons  considered,  the  amount  of  a  man's  money  income 
is  a  satisfactory  indication  of  the  comfort  in  which  he 
lives.  But  Vjetwccn  different  communities  and  countries 
prices  of  particular  articles,  and  especially  of  such  a  thing 


262  THE  DISTRIBUTION  OF  WEALTH 

as  house  rent,  differ  so  widely  that  mere  money  incomes 
afford  no  satisfactory  basis  for  a  comparison  of  the  real 
incomes  that  people  enjoy.  This  consideration  is  exceed- 
ingly important  in  dealing  with  statistics  showing  the 
remuneration  of  labor;  for  between  one  country  and 
another,  differences  in  nominal,  or  money,  wages  may  or 
may  not  indicate  corresponding  differences  in  the  real 
wages  received, 

§  173.   Whenever  the  cooperation  of  the  factors  of  pro- 
duction is  secured  in  the  simplest  manner  possible,  i.e.^  in 
cases  where  all  factors  are  owned  by  a  single 

Simplest  .  1  i        i   i  i 

form  of  man,  private  incomes  depend  solely  upon  the 

prices  obtained  for  the  commodities  that  the 
producer  has  to  offer.  A  farmer,  for  instance,  owning 
his  land  and  capital,  and  employing  no  labor  except  his 
own,  receives  his  share  of  the  social  income  when  he  dis- 
poses of  his  produce  in  the  market.  And  for  a  shoemaker, 
a  tailor,  or  a  storekeeper,  similarly  situated,  the  distribu- 
tion of  wealth  means  nothing  more  than  the  establish- 
ment of  the  value  of  the  goods  or  services  that  he  sells  to 
his  customers.  If  all  production  were  organized  in  the 
simple  manner  just  described,  the  laws  of  value  would 
be  also  the  only  principles  governing  the  division  of  the 
social  income  among  the  various  producers. 

But  production,  as  we  have  seen,  is  usually  organized 

in  a  far  more  complex  fashion,  so  that  the  distribution 

of  wealth  involves  something  more  than  the 

Distribution        .  r  1  t-        i 

usually  com-  simple  process  of  exchange,  l^mployers, 
'*^'  landowners,  capitalists,  and  laborers  cooperate 

in  the  establishment  of  all  large  enterprises,  each  class 
performing  a  separate  function;    and,  after  the  value  of 


NATIONAL   INCOME  AND  ITS  DISTRIBUTION    263 

the  product  has  been  determined,  it  is  necessary  that  a 
satisfactory  division  of  the  proceeds  should  be  secured. 
Thus  the  money  received  from  the  sale  of  products  is 
divided  up  into  the  landowner's  rent,  the  capitahst's  inter- 
est, the  laborer's  vv^ages,  and  the  employer's  profits;  and 
four  different  kinds  of  income  emerge  as  the  result  of  the 
distributive  process. 

§  174.  It  is  worth  while  to  examine  a  little  further  the 
mechanism  by  which  distribution  is  accomplished,  and 
the  relations  that  exist  between  the  various  The  em- 
classes  of  participants.  The  employer,  or  fnXstribu**^^ 
responsible  manager  of  a  business  enterprise,  ^^^^ 
is  the  central  figure  in  the  distributive  process.  He  may, 
and  usually  does,  own  some  part  of  the  capital  invested 
in  the  enterprise,  but  very  often  borrows  a  part.  The 
land  occupied  may  belong  to  him,  or  may  be  rented.  He 
may  perform  clerical  work  or  act  as  superintendent ;  but 
most  of  the  labor,  especially  that  calling  for  a  lower  grade 
of  skill,  will  have  to  be  intrusted  to  hired  workers.  With 
landowner,  capitalist,  and  laborer,  the  employer  must 
arrange  contracts  which  call  for  the  payment  of  specified 
sums  for  rent,  interest,  and  wages;  and  the  obligations 
thus  assumed  must  be  met,  whether  the  enterprise  proves 
profitable  or  not.  If  a  surplus  remains- after  rent,  interest, 
and  wages  have  been  paid,  it  belongs  to  the  employer  as 
the  gross  profits  of  the  business;  but  everything  received 
in  this  manner  is  a  contingent  income  that  is  dependent 
upon  his  ability  to  market  the  product  at  remunerative 
prices.  The  employer's  capital  and  the  entire  proceeds 
of  the  year's  sales  stand  as  a  buffer  between  the  other 
classes  of  participants  and  the  chance  of  loss,  so  that  upon 


264  THE  DISTRIBUTION  OF  WEALTH 

him  the  risks  of  the  business  primarily  fall.  Landowners, 
capitalists,  and  laborers  can  lose  only  when  the  enterprise 
proves  such  a  complete  failure  that  the  employer's  invest- 
ment is  wiped  entirely  out.  The  laborers,  in  fact,  through 
mechanics'  liens  and  other  preferences  accorded  by  the 
law,  are  placed  in  the  position  of  favored  creditors  and 
can  seldom  lose  their  wages,  even  though  the  assets  of  a 
bankrupt  concern  come  far  short  of  meeting  the  liabihties. 

§  175.  We  are  now  ready  to  examine  the  forces  that 
control  the  bargaining  between  employers  and  the  land- 
our  robiem  ^"^''^^^s,  Capitalists,  or  laborers,  with  whom 
they  estabhsh  business  relations.  It  will  be 
our  purpose  to  learn  what  laws  govern  the  amount  that 
must  be  paid  for  rent,  interest,  and  wages,  and  to  ascertain 
under  what  circumstances  a  net  profit  can  accrue  to  a 
business  venture.  If  these  things  can  be  explained,  we 
shall  understand  the  manner  in  which  the  proceeds  of 
industry  are  divided.  It  will  appear  that  distribution  is 
really  a  process  of  valuation,  and  that  the  share  received 
by  the  landowner,  capitalist,  laborer,  or  employer,  depends 
upon  the  value  of  the  contribution  which  his  property  or 
labor  has  made  to  the  product  of  industry. 

At  the  outset  it  will  be  assumed  that  free  competition 
exists ;  so  that  the  value  of  each  commodity  tends  toward 
Competition  its  normal  level,  and  the  division  of  the  product 
assumed.  proceeds  upon  a  competitive  basis.  Through- 
out the  chapter  we  shall  find  ourselves  constantly  returning 
to  the  great  forces  of  supply  and  demand,  upon  which  all 
values  depend ;  in  fact,  all  the  laws  of  distribution  are  but 
particular  apphcations  of  the  general  principles  with  which 
we  became  familiar  in  our  study  of  the  theory  of  value. 


INTEREST  265 

n.  Interest 

§  176.  A  part  of  the  proceeds  of  industry  must,  obvi- 
ously, go  to  replace  the  capital  consumed  in  production. 
Then,  in  addition  to  the  return  or  replacement  Nature  of 
of  the  funds  invested,  owners  of  capital  receive  ^'^t^''®^^- 
an  annual  income  known  as  interest,  which  takes  the  form 
of  a  stipulated  percentage  of  the  principal.  This  return 
must  be  received  not  only  by  the  lenders  who  invest  their 
funds  with  managers  of  productive  enterprises,  but  also 
by  any  manager  who  supplies  a  part  or  the  whole  of  the 
capital  which  he  employs.^  Payment  for  an  actual  loan, 
therefore,  is  but  one  form  which  interest  assumes;  capital 
invested  by  the  employer  himself  must,  no  less  than  that 
of  the  "money  lenders,"  yield  an  annual  income  to  the 
owner. 

Since  money  is  the  medium  by  which  most  transfers  of 
capital  are  made,  and  the  standard  by  which  its  value  is 
measured,   an  investment  of  capital  is  often   ^  ^      ^    ^ 

'  '^  Interest  not 

called  an  investment  of  money,   and  interest  a  payment 

for  money. 

is  frequently  said  to  be  a  payment  for  the  use 
of  money.  Such  a  choice  of  terms  does  no  harm  if  one 
is  careful  to  remember  that  in  most  cases  it  is  other  things 
than  money  that  are  actually  invested ;  and  that  interest  is 
paid  for  productive  capital,  whatever  its  form  may  be. 
The  money  which  is  said  to  be  invested  in  a  factory  is  in 
reality  expended  in  erecting  buildings  and  purchasing 
equipment;  and  the  investment  really  consists  of  these 
instruments  of  production,  and  not  of  the  money  by  which 

1  The  income  which  the  employer  receives  in  this  way  comes  to  him, 
not  by  virtue  of  his  position  as  entrepreneur,  hut  by  reason  of  his  exercis' 
Ing  the  additional  function  of  capitalist. 


266  THE  DISTRIBUTION  OF   WEALTH 

they  were  transferred  from  producers  to  factoiy  owners. 
Although  this  may  seem  to  be  a  simple  matter,  confusion 
has  often  arisen  at  this  point.  It  has  been  proposed  to 
make  capital  cheap,  i.e.,  to  lower  the  rate  of  interest,  by 
increasing  the  quantity  of  money  in  circulation;  whereas 
the  circulating  medium  might  be  increased  indefinitely 
without  making  instruments  of  production  any  more 
abundant,  or  lowering  the  rate  of  interest  that  one  must 
pay  for  their  use.  Money  is  a  medium  for  transferring 
capital,  just  as  a  freight  car  is  a  medium  for  transferring 
wheat;  and  the  way  to  make  capital  abundant  is,  like 
the  way  to  make  wheat  abundant,  to  increase  the  quantity 
of  the  thing  transferred  rather  than  to  multiply  unneces- 
sarily the  apparatus  employed  in  eflPecting  the  transfer. 
Not  an  inordinate  number  of  freight  cars,  but  more  wheat ; 
not  an  endless  supply  of  money,  but  more  buildings, 
tools,  and  machines  will  be  needed,  in  the  one  case  as  in 
the  other,  to  make  the  supply  abundant  and  to  reduce 
the  value. 

§  177.  The  rate  of  interest  that  capital  can  command 
will  depend,  like  the  income  derived  from  anything  else, 
Rate  of  inter-  upon  the  conditions  of  demand  and  supply, 
ondeman/  Turning  now  to  the  former,  we  find  that 
and  supply,  capital  is  demanded  by  business  men  who 
are  constantly  seeking  to  extend  existing  enterprises 
or  to  estabHsh  new  ones.  In  a  country  where  the  natural 
resources  are  large  and  but  little  exploited,  the  products 
obtainable  from  a  given  investment  of  capital  will  be  large, 
and  the  demand  is  likely  to  be  strong ;  whereas,  in  an  older 
country  that  is  more  fully  developed,  a  smaller  product 
can  be  obtained,  and  the  demand  will  be  less  intense. 


INTEREST    .  267 

So,  too,  when  business  is  active  and  profits  unusually 
large,  entrepreneurs  will  desire  to  obtain  a  larger  quantity 
of  capital  and  can  afford  to  pay  a  better  rate;  while  a 
period  of  industrial  depression  produces  the  opposite 
effect.  In  all  cases  the  demand  will  increase  if  the  rate 
of  interest  is  low ;  since  it  is  easier,  when  capital  is  cheap, 
to  find  enterprises  in  which  its  productivity  is  great  enough 
to  warrant  its  employment;  whereas,  when  the  rate  rises, 
employers  find  it  impossible  to  use  capital  in  so  many 
undertakings,  and  the  demand  will  dechne.  In  every 
industry,  in  fact,  there  is  a  considerable  margin  within 
which  capital  can  supplant  labor,  if  it  can  be  obtained 
on  easy  terms ;  and  where  labor  will  be  used  in  preference 
to  machinen-  if  the  rate  of  interest  is  high  (§  45).  When 
all  circumstances  are  taken  into  account,  it  is  evident 
that  the  demand  will  vary  directly  as  the  productivity  of 
capital,^  and  inversely  as  the  rate  at  which  it  is  offered. 

§  178.  It  is  frequently  said  that  interest  is  obtained 
because  capital  is  productive;  and  this  is  considered  a 
sufficient  explanation  both  of  the  fact  that  The  supply 
interest  is  paid,  and  of  the  rate  of  payment  that  o*<=*P'tai- 
is  exacted.  But  if  capital  could  be  procured  without  sac- 
rifice upon  the  part  of  any  one,  and  in  quantity  sufficient 
to  meet  the  needs  of  industry,  nothing  could  be  obtained 

^  Or,  strictly,  as  the  marginal  productivity  of  capital.  All  parts  of  the 
supply  are  not  equally  productive.  Capital  used  in  enterprises  for  which 
the  natural  resources  are  greatest  or  the  demand  most  urgent  yields  morv 
than  in  many  later  enterprises,  which  it  is  only  just  wt)rth  while  to  estab- 
lish. As  a  country's  supply  of  capital  increases,  and  the  best  opportunities 
are  taken,  the  marginal  productivity  declines.  Everywhere  it  is  the  pro- 
ductivity ijf  the  least  jKOfluctive  unit  <;f  the  supply,  i.e.,  the  marginal  |)roduct, 
that  determines  the  importance  of  any  single  unit  of  capital. 


268  THE  DISTRIBUTION  OF  WEALTH 

for  its  use;  and  interest  would  disappear  as  a  share  in 
distribution.  Indeed,  people  wlio  were  anxious  to  pro- 
vide for  their  future  would  even  offer  to  pay  some 
trustworthy  person  who  would  furnish  a  safe  place 
for  storing  their  savings.  Interest  is  paid  not  merely 
because  capital  is  productive,  but  because  it  costs  some- 
thing to  obtain  enough  of  it  to  satisfy  the  demands  of 
business.  This  leads  us  to  examine  the  conditions  that 
govern  the  supply. 

As  has  been  explained  elsewhere,  the  formation  of  capi- 
tal requires  abstinence,  or  the  sacrifice  of  the  present  to 
Abstinence  ^^^  future.  The  person  who  lends  the  sum  of 
$1000,  or  invests  a  similar  amount  of  capital 
in  an  enterprise  of  his  own,  sacrifices  a  present  income  for 
one  available  only  at  some  future  date,  —  we  will  suppose, 
the  end  of  a  year.  Ordinarily  no  one  would  care  to  do 
this  unless  some  inducement  was  offered  him  as  a  com- 
pensation for  his  waiting.  This  is  partly  because  the 
future  is  often  uncertain,  and  a  future  payment  of  $1000 
is  not  so  assured  a  thing  as  $1000  now  in  hand.  But  it 
is  due  also  to  the  fact  that,  even  where  it  is  as  certain  as 
death  or  taxes,  a  future  pleasure  or  pain  is  undervalued  as 
compared  with  a  present  one.  For  these  reasons  a  person, 
who  would  obtain  a  loan  must  offer  to  return  at  the  expi- 
ration of  the  stipulated  period  something  more  than  the 
principal  which  he  borrows,  and  people  who  consume 
commodities  produced  with  the  aid  of  a  certain  amount 
of  capital  must  pay  prices  that  will  allow  the  employer 
to  recover  something  more  than  has  been  expended  for 
materials  and  appliances.  Future  goods  are  worth  less 
than  present,  and  when  one  is  exchanged  for  the  other,  a 


INTEREST  269 

premium  or  bonus  must  be  paid  to  the  person  who  sac- 
rifices the  present  for  the  future.  Not  $1000  of  future 
income,  but  $1050  or  S1060  will  be  needed  to  obtain  the 
use  of  $1000  of  ready  cash  for  the  period  of  a  year.  The 
premium  required  to  make  the  future  income  equal  to 
the  present  is  interest. 

But  all  capital  does  not  represent  equal  amounts  of  sac- 
rifice; it  is  supphed  by  different  classes  of  persons,  and 
with   different   degrees   of  difficulty.     It   may  capital  repre- 

-  ,  .       .         ,  .•  ,        sents  diifer- 

come  from  people  enjoy mg  large  mcomes  who  gnt  amounts 
can  readily  save  a  considerable  proportion  of  of  abstinence, 
what  they  gain ,  it  may  be  furnished  by  persons  of  moderate 
means  who  desire  to  provide  for  the  future,  and  would  do  so 
even  if  the  rate  of  interest  should  fall  to  a  very  low  figure : 
and,  in  the  third  place,  it  is  supplied  by  a  large  number 
of  marginal  investors  who  will  furnish  more  or  less  capital 
according  to  the  inducement  that  is  offered.  These  mar- 
ginal investors  may  be  wealthy  people,  or  persons  of  mod- 
erate means,  whom  a  high  rate  of  interest  will  induce  to 
increase  their  savings,  or  they  may  be  people  of  a  less 
provident  disposition  who  would  save  nothing  without  a 
fairly  strong  and  obvious  stimulus  to  thrift. 

In  this  way  it  comes  about  that,  although  a  certain 
amount  of  capital  might  be  had  for  little  or  nothing,  the 
large  supply  already  invested  in  business,  and  guppiy  varies 
the  still  larger  supply  that  will  be  wanted  to-  with  rate  ot 

'='*'•'  .  interest. 

morrow,  cannot  be  secured  except  by  offermg 
a  fair  rate  of  interest.     Moreover,   it   appears   that   the 
higher  the  rate,  the  larger  will  be  the  aggregate  amount 
of  capital  offered ;  so  that  the  supply  will  vary  directly  a3 
ihe  rate  of  interest. 


570 


THE  DISTRIBUTION-  OF  WEALTH 


A  number  of  writers  in  recent  years  have  been  inclined 
to  doubt  whether  any  such  relation  exists  between  the 
Controversy  amount  of  Capital  saved  and  the  rate  offered 
at  this  point,  f^j.  j^g  ^gg_  They  have  perceived  that  a  con- 
siderable number  of  persons  would,  in  any  event,  endeavor 
to  provide  for  the  future,  and  they  argue  that  the  lower  the 
remuneraticai  received,  the  more  must  a  man  save  in  order 
to  provide  a  comfortable  income  upon  which  he  may 
retire.  They  believe  that  the  habit  of  saving  is  now  so 
firmly  established  that  the  process  would  continue  on 
about  the  same  scale  as  at  present  no  matter  what  the  rate 
of  interest  might  be.  This  is  a  comfortable  beUef  for  one 
who  advocates  poHcies  that  are  destructive  of  thrift  and 
prudence ;  but  it  overlooks  the  fact  that,  while  some  capi- 
tal undoubtedly  would  be  accumulated  without  the  induce- 
ment of  a  good  rate  of  interest,  a  considerable  part  of  our 
present  supply  comes  from  persons  who  will  save  more  or 
save  less  according  to  the  rate  obtainable  from  invest- 
ments. It  also  fails  to  give  sufficient  weight  to  the  fact 
that  constant  saving  is  needed,  not  only  to  make  additions 
to  the  supply  of  capital,  but  also  to  keep  up  the  present 
stock.  For  capital  is  maintained  intact  only  by  constant 
replacement ;  and  the  inducement  to  replace  the  buildings, 
materials,  and  appliances  consumed  in  productive  indus- 
try, is  in  no  way  different  from  that  required  for  saving 
additional  capital.  In  order  to  maintain  the  present 
stock  as  well  as  to  provide  for  the  growing  needs  of  indus- 
try, the  savings  of  the  class  of  marginal  investors  are 
required;  and  so  long  as  this  is  the  case  our  aggregate 
supply  of  capital  will  vary  with  the  inducements  offered 
to  capitalists 


INTEREST  27  r 

§  179.  The  rate  of  interest,  Kke  the  price  of  a  commodity, 
must  be  such  as  will  equalize  the  supply  and  the  demand. 
A  given  stock  of  capital  cannot  command  a 

°  ^  _  Equalization 

higher  rate  than  is  offered  by  the  marginal  of  demand 
producer,  who  employs  such  capital  as  he  ob- 
tains under  conditions  of  the  least  productivity.  But 
though  this  rate  may  have  to  be  accepted  for  a  short  time, 
it  cannot  prevail  for  any  considerable  period,  unless  it  is 
adequate  compensation  for  the  sacrifices  incurred  by  the 
marginal  investor,  to  whom  a  considerable  premium  must 
be  offered  in  order  to  induce  him  to  exchange  present 
goods  for  future.  On  the  other  hand,  if  a  given  stock 
commands  a  rate  that  is  greater  than  the  marginal  sacri- 
fice required  to  obtain  it,  the  supply  will  gradually  increase 
until  its  diminishing  marginal  productivity  lowers  the 
price  to  a  point  that  no  more  than  satisfies  the  marginal 
investor.  Thus  the  normal  rate  of  interest  is  such  as  will 
cause  an  equilibrium  of  supply  and  demand,  and  depends, 
like  the  normal  value  of  a  commodity,  upon  the  demand  of 
the  marginal  consumer  and  the  sacrifices  of  the  marginal 
producer. 

§  180.  So  far  we  have  considered  nothing  but  the  re- 
turn received  for  productive  capital,  but  we  must  now 
examine  briefly  two  other  forms  that  interest  other  classes 
may  assume.  Owners  of  certain  durable  0*'°^°^ 
consumer's  goods,  such  as  dwelling  houses,  may  lease 
their  f)ropcrty  to  tenants  and  obtain  a  stii)ulatcd  annual 
income  from  the  investment.  In  such  transactions  present 
goods  are  exchanged  for  future,  just  as  truly  as  in  a  loan  of 
productive  capital;  and  the  annual  income  secured  from 
property  of  this  character  will  be  determined  in  precisely 


272  THE  DISTRIBUTION  OF  WEALTH 

the  same  manner  as  the  rate  paid  for  capital  used  in  pro- 
duction. Loans  are  sometimes  made  for  personal  expen- 
diture and  not  for  the 'support  of  productive  undertakings. 
These  are  all  too  numerous,  but  are  generally  for  small 
amounts,  so  that  their  aggregate  mass  is  comparatively 
unimportant  when  contrasted  with  the  enormous  amounts 
of  capital  employed  in  industry.  So  far  as  they  are  sub- 
ject to  the  law  of  competition,  the  rate  of  interest  upon 
such  loans  is  determined  in  the  manner  described  in  the 
last  paragraph ;  but  in  many  cases  the  ignorance  or  neces- 
sities of  the  borrower  enable  the  lender  to  exact  extortion- 
ate terms. 

§  i8i.  With  all  investments  of  capital,  risk  exercises 
an  influence  upon  rates  of  interest.  Manifestly,  when 
^^^  there  is  a  prospect  of  a  loss  of  both  principal 

and  interest,  a  very  large  premium  will  be  re- 
quired to  equalize  future  goods  with  present ;  and,  in  pro- 
portion as  this  factor  can  be  reduced  or  eliminated,  the 
amount  of  the  premium  will  tend  to  decline.  Risk,  indeed, 
is  not  to  be  considered  a  factor  that  is  independent  of  the 
principles  already  discussed,  but  it  is  one  of  the  circum- 
stances that  affect  the  supply  of  capital  offered  at  any 
given  rate  of  interest.  It  is  important  enough,  however, 
to  require  express  emphasis;  and  an  unusually  high  rate 
of  interest  regularly  points  to  an  unusual  risk. 

§  182.  It  is  a  familiar  fact  of  experience  that  in  a  progres- 
sive country  the  rate  of  interest  tends  gradually  to  decline. 

Tendenc  of     '^^^^  ^^  ^"^  ^^  P^''^  ^°  ^^  increase  of  wealth, 
Interest  to       which  enlarges  the  supply  of  capital  and  reduces 

decline.  .  .      °  rr  /  r 

its  margmal  productivity.  In  a  newer  coun- 
try, hke  the  United  States,  where  natural  resources  are 


INTEREST  27^ 

not  SO  fully  exploited,  many  opportunities  exist  for  tiie 
remunerative  investment  of  capital  which  cannot  be 
equaled  in  an  older  country  like  England  or  France. 
Then,  too,  as  a  country  becomes  more  fully  developed, 
industries  can  be  estabhshed  upon  a  basis  approved  by 
experience,  and  there  is  less  necessity  for  taking  unknown 
risks.  This  makes  business  less  speculative,  and  tends  to 
reduce  the  rate  of  interest.  In  the  United  States  the  rate 
paid  for  capital  is  always  high  in  a  newly  developed  sec- 
tion, running  as  high  as  from  twelve  to  fifteen  per  cent. 
The  growth  of  wealth  and  the  inflow  of  foreign  capital 
gradually  reduce  interest  to  six  or  eight  per  cent;  and 
there  it  is  likely  to  remain  until  the  district  becomes  largely 
independent  of  outside  capital,  which  can  command  five 
per  cent  at  home  and  will  not  be  invested  elsewhere  unless 
higher  rates  are  offered.  In  the  leading  countries  of 
Europe,  the  rate  is  materially  lower  than  in  the  United 
States;  and  it  is  for  this  reason  that  so  much  foreign  cap- 
ital has  sought  investment  on  this  side  of  the  Atlantic. 

§  183.  Although  the  two  things  are  not  different  in  their 
essential  character,  something  should  be  said  concerning 
what  are  known  as  short-  and  long-time  loans.  „^  _ 

'^  Short-  and 

The  former  are  such  loans  as  bankers  make  upon  long-time 
call,  or  for  brief  periods  ranging  usually  from 
one  to  three  months;  the  latter  may  be  represented,  for 
present  purposes,  by  such  an  investment  as  a  five-  or  ten- 
year  loan  upon  real  estate,  secured  by  a  mortgage.  Bank- 
ers' loans  are  sought  by  business  men  who  constantly 
incur  liabilities  that  must  be  met  before  returns  can  be 
secured  from  their  investments.  They  represent,  in  a 
peculiar  sense,  a  demand  for  money  or  credit  needed  upon 


2/4 


THE  DISTRIBUTION  OF  WEAtTH 


short  notice  to  maintain  the  solvency  of  the  borrower;  so 
the  rate  that  they  command  will  fluctuate  according  to 
the  conditions  of  what  is  called  the  money  market.  Ai; 
certain  times  when  the  cash  reserves  of  the  New  York 
banks  are  very  large,  money  may  be  obtained  upon  call 
for  as  Httle  as  one  per  cent;  but,  upon  a  day's  notice, 
some  unfortunate  turn  of  affairs  might  easily  raise  the 
price  of  call  money  to  ten,  twenty,  or  thirty  per  cent.  On 
October  29,  1896,  the  rate  was  ten  per  cent  when  business 
opened  in  the  morning;  by  noon  it  had  jumped  to  fifty 
per  cent  annual  interest,  and  before  night  it  stood  at  eighty 
or  one  hundred  per  cent.  On  the  other  hand,  the  demand 
for  mortgage  loans  is  in  no  way  influenced  by  the  vicissi- 
tudes of  the  money  market;  and  the  interest  rate  may, 
for  a  generation  or  more,  remain  fixed  at  five  or  six  per 
cent.  Even  with  short-time  loans,  it  is  only  the  daily 
fluctuations  that  depend  upon  the  plenty  or  scarcity  of 
ready  money ;  for,  if  yearly  averages  are  studied,  it  appears 
that  the  rate  commanded  by  prime  commercial  paper,  like 
the  rate  upon  .mortgage  investments,  gradually  declines  as  a 
country's  wealth  and  capital  increase.  In  1830  the  Second 
Bank  of  the  United  States  could  obtain  in  Philadel- 
phia and  New  York  seven  per  cent  interest  upon  its  ordi- 
nary discounts,  for  which,  to-day,  a  rate  of  five  per  cent 
would  be  highly  satisfactory  to  a  banker.  The  decline 
has  been  brought  about  by  the  same  causes  that  have 
reduced  interest  upon  mortgages  from  six  or  seven  to  four 
or  five  per  cent  in  the  same  communities.  This  fact 
shows  us  that  short-time  and  long-time  loans  are  governed 
by  the  same  underlying  conditions,  and  that  they  are,  at 
bottom,  transactions  of  precisely  similar  character. 


IVAGES  275 

III.  Wages 

§  184.  Wages  are  the  portion  of  the  product  of  industry 
received  by  the  persons  who  perform  labor,  skilled  or 
unskilled,  mental  or  physical.  In  some  of  the  wages 
higher  occupations  the  remuneration  of  the  ^^^^^^ 
worker  is  called  a  salary,  but  it  does  not  differ  in  its  eco- 
nomic characteristics  from  the  wages  of  the  common 
laborer.  Persons  who  are  without  the  means  necessary 
for  estabhshing  independent  enterprises  must  sell  their 
services  to  employers  and  become  hired  wage-earners ;  but 
wages  may  be  received  also  by  small  independent  pro- 
ducers who  perform  their  own  labor,  and  by  an  employer, 
large  or  small,  who  does  any  of  the  routine  work  of  his 
establishment  in  order  to  avoid  hiring  an  additional  man. 

§  185.  Hired  laborers  may  receive  either  time  or  piece 
wages;  the  former  being  paid  for  each  hour  or  day  that 
labor  is  performed,  the  latter  being  adjusted  Time  and 
to  the  amount  of  work  done.  With  a  time  P'^ce  wages, 
wage  may  go  a  tacit  or  express  understanding  that  a  cer- 
tain quantity  of  work  shall  be  accomplished,  and  piece 
wages  may  be  computed  upon  a  basis  that  will  enable  the 
average  worker  to  earn  about  so  much  j)er  day  or  week, 
so  that  the  di (Terence  between  the  two  methods  is  not  always 
so  great  as  might  ap[)ear  at  first  sight.  Yet,  in  general, 
the  piece  system  gives  the  workman  a  somewhat  greater 
stimulus  to  turn  out  a  large  product.  It  happens,  very 
often,  that  both  methods  of  remuneration  coexist  in  the 
same  industry;  and,  in  such  cases,  it  will  usually  be  found 
that  the  labor  cost  of  ea(  Ii  uiiil  of  product  is  about  the 
same.     Indeed,  comj)etition  between  employers  can  pro- 


276  THE  DtsmrBUTTON-  OF  WEALTH 

duce  no  other  result,  because  an  establishment  that  pro- 
duces  at  a  considerably  higher  labor  cost  than  rules  in 
the  rest  of  the  trade  is  likely  to  be  forced  out  of  the 
field. 

This  leads  to  the  further  consideration  that  labor  cost 

is  a  very  different  thing  from  rates  of  time  wages.     A  high 

daily  or  weekly  wage  indicates  generally  ^  a.  high 

Ld.D0r  cosr. 

standard  of  efhciency,  which  makes  the  labor 
cost  no  higher  than  it  is  in  other  districts  or  countries  where 
lower  rates  are  paid.  In  point  of  fact  the  total  cost  of 
production  is  likely  to  be  lower  where  high-grade  labor 
is  employed ;  for  the  increased  wages  are  made  good  by 
the  greater  efficiency,  while  the  product  of  a  given  plant 
is  increased  with  a  corresponding  reduction  of  the  fixed 
charges  that  enter  into  each  unit  of  the  output.  In  com- 
paring daily  or  weekly  wages  paid  in  the  United  States 
with  those  which  prevail  in  other  lands,  this  consideration 
is  of  the  very  greatest  importance. 

§  1 86.  The  rate  of  wages  represents  the  value  which 
labor  possesses  under  the  existing  conditions  of  supply  and 
„  ^    ^  demand,  and  is  determined  in  the  same  general 

Rate  of  '  o 

wages  de-       way  as  the  value  of  anything  else.     There  are, 

pends  on  ....  .... 

supply  and  cvcn  withm  the  same  district,  almost  as  many 
grades  of  labor  as  there  are  kinds  of  com- 
modities; so  that  the  laboring  class  is  divided  into  vari- 
ous groups,  each  possessing  a  particular  kind  or  degree 
of  abihty  and  receiving  a  different  remuneration  for  its 
services.     We  must  now  investigate  the  forces  that  govern 

'  If  no  tariff  exists  to  draw  labor  into  some  industries  where  it  is  less 
productive  than  in  the  others,  a  high  rate  of  wages  always  points  to  high 
efficiency. 


WAGES 


277 


the    demand   for  labor  and  the  supply  of  this  agent  of 
production. 

§  187.  The  demand  for  any  particular  grade  of  labor 
will  depend  on  the  value  of  what  it  can  produce.  An  inde- 
pendent farmer  or  artisan  who  sells  the  product  Demand  for 
of  his  own  hands  can,  obviously,  receive  for  his  ^^''°''- 
labor  no  more  than  the  value  of  his  goods ;  and  the  same 
thing  is  true  of  the  hired  workman,  under  the  operation 
of  a  healthy  competition,  although  the  complexity  of  the 
distributive  process  makes  this  fact  less  easy  to  perceive. 
An  employer  can  afford  to  pay  no  more  than  a  workman 
adds  to  the  productivity  of  the  farm  or  factory,  and,  there- 
fore, the  demand  for  any  grade  of  labor  must  depend  upon 
what  its  productivity  is  considered  to  be.  A  skillful  super- 
intendent who  can  secure  the  maximum  output  from  each 
man  or  machine  in  a  factory  is  the  most  productive  person 
in  the  employ  of  the  establishment,  and  his  services  will 
be  in  demand  at  a  high  salary;  while  the  workman  of 
inferior  intelligence  or  industry,  unskilled  in  any  trade, 
produces  little  and  is  wanted,  if  at  all,  only  at  the  lowest 
wages.  These,  of  course,  are  the  two  extremes;  and 
between  them  there  may  be,  in  any  locality,  100  or  1000 
different  classes  of  laborers  representing  as  many  grades 
of  productivity  and  subject  to  corresponding  differences 
in  demand. 

Bearing  in  mind  that  different  grades  of  labor  will  be  de- 
manded only  at  wages  that  correspond  to  their  varyingdcgrccs 
of  produclivitv,  we  must  next  study  a  little  more 

'  ^      ,   _  ■'  Demand  for 

closely  the  conditions  that  control  the  demand  various  grades 

for  any  single  grade  of  workmen.     It  is  a  fact 

of  experience  that  a  few  laborers  of  the  same  class,  all  of 


278 


THE  DISTRIBUTION  OF  WEALTH 


whom  may  compete  for  the  same  kind  of  employment, 
will  find  that  their  services  are  in  demand  at  a  higher  price 
than  could  be  obtained  if  their  numbers  should  suddenly 
be  increased.  This  is  because,  in  any  market,  the  produc- 
tivity of  any  kind  of  labor  gradually  diminishes  as  the 
supply  is  enlarged.  A  few  workmen,  even  though  un- 
skilled, when  employed  at  a  few  places  where  the  natural 
resources  are  the  greatest,  will  create  a  larger  product  than 
additional  laborers  of  the  same  class  who  have  to  be  used 
in  industries  for  which  the  conditions  are  less  favorable. 
Then,  too,  on  each  farm  or  in  each  factory  only  a  certain 
number  of  men  are  needed  in  order  to  secure  the  maximum 
efficiency ;  and  beyond  that  point,  additional  hands  will 
not  yield  a  proportionate  increase  of  the  output  — -  a  con- 
dition due  to  the  variation  of  productive  forces  (§§43-45). 
It  follows,  necessarily,  that  the  wages  offered  the  mar- 
ginal workman  must  decline  as  the  supply  of  workmen 
increases. 

It  is  evident,  moreover,  that  the  demand  for  the  services 
of  each  class  of  workmen,  depending,  as  it  does,  upon  the 
Demand  valuc  of  the  product,  must  vary  according  to 

vereei  *as  ^^  price  that  is  asked.  A  few  men  of  a  certain 
price.  grade  of  skill  might  find  a  few  employers,  enjoy- 

ing the  greatest  natural  advantages,  who  could  afford  to 
pay  the  very  highest  v^ages.  A  larger  body  of  workmen 
must  turn  to  other  occupations,  or  must  add  to  the  number 
employed  in  the  most  favored  industries;  and  in  either 
case  the  productivity  of  the  marginal  laborer  will  decline. 
The  result  will  be  that  the  larger  supply  of  labor  can  be 
taken  off  the  market  only  at  a  lower  rate,  by  employers 
whose  situation  does  not  permit  them  to  offer  as  much  as 


IVAGES  279 

had  previously  been  paid.  Each  increase  of  numbers,  in 
fact,  reducing  the  marginal  product,^  will  reduce  the  rate 
still  further  so  that  the  conditions  of  the  labor  market 
resemble  those  which  rule  in  other  markets.  A  high  price 
attracts  but  few  employers,  while  low  rates  steadily  in- 
crease the  demand  until  it  becomes  large  enough  to  ab- 
sorb the  supply.  With  labor,  as  with  other  things,  the 
demand  will  vary  inversely  as  the  price. 

§  188.  Turning  now  to  the  conditions  that  govern  the 
supply,  we  must  observe  that  labor,  hke  capital,  has  a 
cost  of  production,  and  that  an  adequate  The  supply 
supply  cannot  be  had  unless  the  remunera-  °^^^^°^- 
lion  of  the  workman  is  sufficient  to  cover  the  cost  of  his 
services.  For  any  given  class  the  cost  of  production 
means  the  standard  of  living  that  the  laborers  are  deter- 
mined to  maintain;  i.e.,  the  quantity  of  the  necessaries, 
comforts,  or  even  luxuries  that  must  be  offered  in  order  to 
obtain  an  adequate  number  of  workmen  at  a  given  time, 
and  to  induce  them  to  marry  and  perpetuate  the  supply 
of  labor.  From  class  to  class  this  standard  shows  varia- 
tions that  sometimes  are  exceedingly  great  and  produce 
material  differences  in  wages. 

Laborers  of  the  lowest  intelligence  and  industry  are 

1  This  does  not  mean  that,  as  time  passes  and  population  increases,  the 
marginal  laborer  produces  less  and  less,  so  that  the  rate  of  wages  steadily 
declines.  Such  an  inference  is  as  incorrect  as  the  dismal  conclusion  some- 
times drawn  from  the  law  of  diminishing  returns  to  land  (p.  81).  While 
the  marginal  productivity  of  a  small  number  of  laborers  must  ai  any  tiint 
be  greater  than  that  of  a  larj^er  number,  improvements  in  production  may, 
and  probably  do,  enable  the  additional  workmen  supplied  by  a  growing 
population  to  produce  as  much  as  the  marginal  lab(jrers  of  former  periods. 
In  progressive  countries,  at  least,  this  is  wlial  occurred  during  the  nine 
leenth  century. 


28o  THE  DISTRIBUTION  OF  WEALTH 

likely  to  show  little  forethought  in  assuming  the  responsb 
bilities  of  marriage,  with  the  result  that  an  adequate  supply 
.The  supply  of  of  such  serviccs  as  they  are  able  to  perform 
gf^ggg"""®  can  be  had  at  a  very  low  cost  —  which,  if  con- 
laborers,  ditions  are  unfavorable,  may  be  no  more  than 
is  necessary  to  keep  soul  and  body  together.  If  immigra- 
tion is  practically  unrestrained,  as  in  the  United  States, 
the  cost  of  producing  this  grade  of  labor  may  be  not  that 
of  rearing  a  family  in  this  country,  but  the  cost  in  some 
of  the  poorest  districts  of  Europe.  It  is  in  such  strata  of 
the  laboring  population  that  the  struggle  for  existence  is 
fiercest,  and  the  pressure  of  numbers  upon  the  available 
means  of  subsistence  most  intense.  Above  this  lowest 
class  come  successive  grades  of  laborers,  possessing  greater 
intelligence,  skill,  and  self-control,  who  insist  upon  having 
something  better  than  the  bare  necessities  of  physical  exist- 
ence, and  who  will  not  rear  large  families  of  children  un- 
less favorable  conditions  of  hving  are  reasonably  assured. 
At  the  top  of  the  pyramid  are  the  smallest  classes,  con- 
sisting chiefly  of  brain  workers,  of  whom  an  adequate 
supply  cannot  be  obtained  unless  the  remuneration  is 
sufficient  to  enable  a  man  to  give  his  children  the  best  of 
commercial,  technical,  or  professional  training  and  all  the 
other  advantages  which  he  himself  has  enjoyed.  The 
desire  of  each  class  to  maintain  its  position  and  educate 
children  to  a  station  at  least  as  good  as  that  of  their  par- 
ents, is  the  factor  that  determines  the  cost  of  each  grade  of 
labor. 

From  what  has  preceded,  it  follows  that  the  laboring 
population  is  divided  into  a  large  number  of  grades,  between 
which  httle  direct  competition  can  exist,  because  members 


WAGES  281 

of  a  lower  class  lack  either  the  general  intelligence  or  the 
special  training  required  for  the  work  performed  by  a  higher 
class.    Labor-saving  machinery  often  enables  an 

'^  •'  Competition 

inferior  grade  of  workmen  to  compete  for  work  between 
formerly  done  by  a  superior,  and  thus  destroys 
the  line  of  demarcation  between  the  two  classes.  But, 
except  in  such  cases,  there  can  be  little  direct  competition ; 
and  this  is  increasingly  true  as  we  pass  from  the  bottom 
to  the  top  of  the  pyramid.  Indirect  competition,  however, 
is  much  more  active,  since  self-sacrificing  parents  can 
educate  their  children  for  the  higher  callings  in  Hfe,  pro- 
vided that  a  system  of  popular  education  affords  the  nec- 
essary opportunities.  It  is  obvious  that  the  children  of  a 
higher  class  are  likely  to  receive  a  better  start  in  life  than 
those  belonging  to  a  lower;  but  ability  and  character  are 
not  the  exclusive  possession  of  the  offspring  of  any  one 
class,  and  a  good  system  of  public  schools  may  enable  the 
poorest  boy  to  rise  to  the  highest  and  most  remunerative 
position. 

It  must  now  be  explained  that  the  standard  of  living,  and, 
therefore,  the  cost  of  production,  is  not  precisely  the  same 
for  all  the  laborers  of  a  given  class.     Some  supply  of 
workmen  will  be  satisfied  with  less  than  others  withmtTo^f 
of  no  greater  efficiency  will  demand,  so  that  a  ^^^es. 
little  labor  of  any  particular  grade  can  be  obtained  for 
less  than  must  be  paid  for  a  large  supply.     For  each  class 
there  is  a  minimum  supply  price,  which  must  be  paid  if 
any  workmen  are  to  be  obtained;  and  beyond  this  point 
the  supply  can  be   enlarged   only  by   raising   the   price 
that  is  offered.     It  is  evident,  therefore,  that  the  supply 
of  any  grade  of  labor  will  vary  directly  with  the  rate  of 


282  THE  DISTRIBUTION  OF  WEALTH 

*vages,  rising  as  the  rate  is  increased  and  falling  as  it 
decreases. 

§  189.  We  have  seen  that  the  demand  for  labor  depends 
on  the  value  of  the  product  of  the  marginal  workman,  and 
The  normal  varies  inversely  as  the  price.  It  is  evident,  also, 
^^^®"  that  the  supply,  depending  on  the  cost  of  ob- 

taining the  services  of  the  marginal  laborer  who  has  the 
highest  standard  of  living,  will  vary  directly  as  the  remu- 
neration offered.  The  normal  wage  fixed  by  the  forces  of 
demand  and  supply  must  be  such  a  rate  as  will  equalize 
the  two  forces,  and  call  out  a  sufficient  supply  to  meet  the 
demand  at  the  price  which  the  marginal  producer  can  pay. 
The  value  of  labor,  therefore,  under  conditions  of  health- 
ful  competition,  is  determined  in  the  same  manner  as  the 
value  of  other  things. 

It  should  be  observed,  however,  that,  since  human  lives 

are  involved,  the  supply  of  labor  does  not  adjust  itself 

readily  to  the  conditions  of  demand,  and  that 

Labor  is  a  _  -^ 

peculiar  com-  it  can  be  decreased  only  with  the  greatest  hard- 

modity.  ,,,... 

ships,  and  increased  only  by  immigration  or 
the  gradual  growth  of  population.  These  peculiarities  will 
receive  due  consideration  in  the  following  chapter,  but  for 
the  present  it  is  sufficient  merely  to  call  attention  to  them. 
Freedom  to  migrate  makes  it  easy  to  reduce  the  supply  of 
labor  in  any  market  when  the  value  falls  below  the  standard 
of  living  of  the  marginal  workmen,  and  unrestricted  immi- 
gration renders  it  more  difficult  to  adjust  supply  to  market 
conditions.  Public  education  and  all  influences  that 
tend  to  elevate  the  intellectual  and  moral  condition  of  the 
laborer  or  to  increase  his  efficiency  enable  him  to  compete 
more  effectively  for  a  wage  that  will  make  it  possible  to 


RENT  283 

maintain  his  standard  of  living.  Yet,  after  all  allowance 
is  made,  it  remains  true  that  labor  differs  in  important 
respects  from  other  commodities. 

The  student  may  have  noticed  that  our  discussion  of 
the  law  of  wages  has  proceeded  upon  the  assumption  that 
the  familv  is  the  economic  unit,  and  that  the  „    ^ 

'  The  family  is 

remuneration  of  anv  class  of  laborers  must  be  the  economic 

.  '  unit. 

adequate  to  msure  a  future  as  well  as  a  present 
supply  of  workers.  Whenever  the  wife  and  children  are  able 
or  wiUing  to  find  employment,  in  the  hope  of  increasing 
the  earnings  of  the  family,  it  usually  happens  that,  before 
long,  the  remuneration  of  the  father  decreases.  This  is 
because  it  costs  less  to  secure  his  services  and  to  insure  a 
future  supply  of  workmen  like  him,  when  he  is  no  longer 
obliged  to  support  his  entire  family  out  of  his  earnings. 
We  see  here,  also,  a  reason  why  the  wages  of  women  are 
likely  to  be  less  than  those  of  men,  even  when  they  perform 
the  same  work.^  A  woman,  in  a  majority  of  cases,  does 
not  have  the  burden  of  supporting  an  entire  family,  and 
her  services  can  consequently  be  obtained  for  less  than 
men  must,  upon  an  average,  receive.  Considerations  like 
these  are  of  great  importance  in  dealing  with  problems 
connected  with  the  employment  of  women  and  children. 

IV.  Rent 

§  190.  When  competition  prevails,  the  normal  value 
of  any  commodity  must  be  high  enough  to  compensate 

*  Frequently  the  work  is  not  the  same,  even  when  it  appears  to  lie  so 
upon  first  examination.  The  most  efficient  woman  may  be  lost  to  the 
ejrployer  by  her  marriage  at  any  time  ;  and  she  is  actually  worth  less  than 
ftman  whom  the  employer  can  expect  to  retain. 


284  "^^^  DISTRIBUTION  OF  WEALTH 

the  marginal  producer  for  the  labor  and  capital  required 
to  procure  the  most  costly  portion  of  the  supply.  Wages 
Differential  and  interest  must  be  received  by  even  the  mar- 
^^*°^'  ginal  producer,  and  more  than  this  competition 

will  not  allow  him  to  obtain.  But  other  producers,  who, 
on  account  of  superior  situation  or  greater  ability,  are  able 
to  supply  the  commodity  for  less  than  the  marginal  cost, 
find  that  a  surplus  is  left  on  their  hands  after  they  have 
paid  for  all  the  labor  and  capital  that  have  been  expended. 
The  amount  of  this  surplus  will  depend,  obviously,  on  the 
degree  of  superiority  that  the  recipient  enjoys  over  the 
marginal  producer.  In  industries  where  great  differences 
exist  between  the  lowest  and  the  highest  costs  of  produc- 
tion (§  53),  a  very  considerable  part  of  the  total  product 
may  be  absorbed  by  the  superior  producers;  while  the 
surplus  received  by  the  more  favored  establishments  will 
be  small  if  there  is  but  a  slight  difference  between  the 
least  cost  of  production  and  the  greatest. 

The  surpluses  received  by  the  more  favored  entrepreneurs 
may  arise  from  the  possession  of  superior  natural  agents 
of  production  or  from  the  exercise  of  superior  ability 
Rent  and  in  organizing  or  conducting  their  enterprises, 
pro  ts.  j^    ^j^g    former    case,  the    surplus    would    be 

called  rent,  which  may  be  defined  as  the  income  that  ac- 
crues to  the  owner  of  a  natural  agent  of  production ;  in  the 
latter,  it  would  be  considered  profits,  or  the  reward  to  the 
ability  and  enterprise  of  the  successful  entrepreneur.  Both 
of  these  shares  in  the  product  of  industry  now  claim  our 
attention,  and  will  be  treated  in  the  order  indicated  above. 

§  191.  The  natural  agents  of  production  from  which 
incomes  are  derived  may  be  fertile  soils,  well-situated  city 


RENT  285 

lots,  useful  water  powers,  rich  mines,  or  valuable  forests ; 
but  in  all  cases  access  to  them  depends  on  the  control 
of  particular  tracts  of  land,  so  that  we  may,  for 

^  Rent  defined. 

the  sake  of  convenience,  speak  of  rent  as  the 
return  received  by  the  owner  of  land.  To  employ  a  defi- 
nition which  has  attained  considerable  currency  among 
economists,  rent  is  "the  value  of  situation  with  its  natural 
gifts  and  all  the  rights  and  privileges  pertaining  to  the 
occupancy  thereof."  In  the  sense  in  which  the  word  is 
here  employed,  land  is  sharply  contrasted  with  the  im- 
provements, such  as  buildings,  fences,  walks,  ditches,  dikes, 
and  fertilizers,  which  man  places  in  or  upon  it.  All  of 
these  things  are  products  of  human  labor,  and,  in  so  far 
as  they  aid  production,  are  but  special  forms  of  capital, 
for  which  interest,  not  rent,  is  received  by  the  owner. 
Rent,  as  a  category  in  distribution,  includes  nothing  but 
the  return  obtained  from  a  natural  agent  of  production. 

Interest  and  rent  are  sometimes  confused  by  reason  of  the 
fact  that  the  selling  price  of  any  tract  of  land  is  always  com- 
puted by  capitalizing  at  the  current  rate  of  inter-  ^^^^  ^^^  .^ 
est  the  annual  return  which  the  owner  is  able  to  terestnotto 

,       be  confused. 

secure  from  it.  If  a  city  lot  is  so  advantageously 
situated  that  it  yields  a  rent  of  $5000,  while  the  current 
rate  of  interest  is  five  per  cent,  it  will  command  a  price  of 
$100,000.  But  this  fact  throws  no  light  whatever  upon 
the  reasons  why  an  annual  rent  of  $5000  can  be  obtained, 
and  it  is  the  annual  rent  that  needs  to  be  explained.  Ob- 
viously when  land  is  bought  and  sold,  people  will  compare 
the  rent  with  the  interest  derived  from  investments  of 
capital,  and  will  adjust  the  purchase  price  accordingly. 
Our  theory  of  rent,  however,  must  explain  why  rent  is  paid 


±B6  THE  DtSTRlBUTIOM  OP-  WEALTH 

and  what  determines  its  amount,  and  not  whether  the 
selling  value  of  land  is  sixteen,  twenty,  or  twenty-five  years' 
purchase/ 

§  192.    Capital    and    labor    receive    their    appropriate 

shares  of  the  proceeds  of  industry  not  only  because  they 

add  somethinc;  to  the  product,  but  also  because 

Value  of  land  °  r  ' 

depends  on  they  must  have  adequate  remuneration  if  a 
sufficient  supply  is  to  be  obtained.  Land, 
however,  is  not  the  product  of  human  effort,  and  the  pay- 
ment of  rent  is  not  necessary  in  order  to  insure  a  supply 
adequate  for  the  needs  of  industry.  The  supply  of  land 
is  virtually  a  fixed  quantity " ;  and  the  rent  that  it  bears 
depends,  therefore,  on  the  conditions  of  demand  rather 
than  on  those  of  supply.  Like  any  other  thing  the  supply 
of  which  is  definitely  fixed,  the  value  of  land  depends  on 
what  people  will  give  for  it,  not  on  the  cost  of  producing 
or  reproducing  the  supply. 

§  193.  With  land  used  for  residential  purposes  the 
forces  governing  rent  may  be  studied  in  their  simplest 
Rent  of  build-  fo^m.  When  the  handful  of  Dutch  colonists 
mgiots.  ^^]^Q     bought    Manhattan     Island     from    the 

Indians  erected  their  first  dwelHngs,  a  house  lot,  even 
in  the  section  adjoining  the  Battery,  could  have  had  almost 

^  Tvventy-tive  years'  purchase  would  mean  a  purchase  price  equal  to 
twenty-five  times  the  annual  rent.  This  would  give  a  four  per  cent  return 
upon  the  investment. 

2  There  is,  of  course,  a  certain  amount  of  "  made  land  "  which  has  been 
reclaimed  from  the  water  ;  but  it  is  so  small  in  comparison  with  the  total 
land  surface  of  the  globe  as  to  be  practically  a  negligible  quantity.  More- 
over, unlike  the  supply  of  labor  or  of  capital,  land  once  reclaimed  generally 
does  not  need  to  be  continually  reproduced  by  the  further  expenditure  ol 
human  effort. 


RENT  287 

no  value,  because  the  supply  was  ample  and  the  demand 
insigniticant.  But  as  the  population  of  the  island  grew 
to  thousands,  then  scores  of  thousands,  and  finally  hundreds 
of  thousands,  the  supply  of  land  could  be  but  slightly 
increased  by  reclaiming  marshes  or  sites  along  the  water 
front,^  and  the  value  of  building  lots  steadily  rose.  That 
sites  on  Fifth  Avenue  which  in  1626  were  worth  nothing 
command  to-day  a  princely  rental  is  due  to  no  other 
cause  than  the  pressure  of  an  increasing  demand  upon 
an  inelastic  supply  of  land. 

And  with  land  used  in  production  the  case  is  the  same. 
The  demand  for  agricultural  land  or  for  lots  on  Broad- 
way comes  from  men  who  wish  to  establish  Land  used  in 
business  enterprises,  and  the  price  offered  pi'O'iuction. 
will  depend  on  the  facilities  which  the  particular  site 
affords.  If  the  normal  price  of  wheat  is  eighty  cents  per 
bushel,  and  the  fertility  or  advantageous  location  of  a 
farm  enables  the  producer  to  place  his  grain  in  the  market 
at  a  cost  of  not  more  than  seventy  cents,  the  landowner 
can  obtain  a  rent  of  ten  cents  per  bushel."  On  the  other 
hand,  land  on  which  wheat  cannot  be  raised  at  a  smaller 
cost  than  eighty  cents  per  bushel  will  yield  no  rent,  and 
will  not  be  cultivated  unless  it  can  be  had  for  nothing. 
Similarly  the  rent  of  a  factory  site  will  be  measured  by 
the  extent  to  which  the  situation  and  other  advantages 
reduce  the  cost  of  production  below  that  of  the  marginal 

'  The  original  area  of  Manhattan  Island  was  about  10,000  acres;  an'i 
not  more  than  2500  acres  of  "  made  land  "  have  been  added  to  this. 

2  If  each  acre  of  the  land  produced  twenty  bushels,  the  rent  would  be 
$2  per  acre;  and,  if  the  rate  of  interest  were  five  per  cent,  the  selling 
price  of  the  land  would  be  $40. 


288  THE  DISTRIBUTION  OF  WEALTH 

producer.  With  lots  occupied  by  stores  the  main  con- 
sideration is  the  number  of  custcmers  that  can  be  reached; 
for  it  is  evident  that,  by  doing  a  large  volume  of  business, 
many  of  the  expenses  are  made  proportionately  less,  and 
that  the  savings  thus  effected  measure  the  rent  paid. 
If  the  farm  or  factory  site  or  city  lot  happens  to  be  occu- 
pied by  the  owner  instead  of  by  a  tenant,  the  savings 
accrue  to  his  benefit,  so  that  he  obtains  a  rent  just  as  truly 
as  if  he  had  leased  his  land  to  another  person. 

When  competition  prevails,  each  tract  of  land  will 
normally  be  used  for  that  purpose  which  will  enable  it 
Land  used  for  to  yield  the  highest  rent.  Fertile  land  adjacent 
yields  hi^gh*  ^°  ^  Valuable  water  power  cannot  be  cultivated 
est  rent.  \{  \<^  jg  wanted  for  a  factory  site,  and  arable 

land  on  the  outskirts  of  cities  must  be  cut  up  into  building 
lots  as  fast  as  the  demand  for  dweUing  houses  increases. 
Within  a  growing  city,  business  encroaches  upon  first  one 
and  then  another  section  that  has  been  used  for  residen- 
tial purposes;  while  the  choicest  sites  pass  out  of  the 
hands  of  manufacturers  or  wholesale  dealers,  and  are 
used  for  office  buildings  or  for  department  stores.  In 
all  of  these  cases  we  perceive  the  effects  of  an  increasing 
demand  which  raises  the  rents  of  the  most  favored  tracts 
of  land. 

§  194.   We  must  now  take  account  of  the  fact  that  the 

prices  which  producers  can  offer  for  land  are  influenced 

by   the  operation   of  the  law  of  diminishing 

diminishing     rctums.     If  the  retums  to  labor  and  capital 

jeturas.  .  .  . 

mvested  upon  a  given  tract  increased  propor- 
tionately until  the  point  was  reached  at  which  no  addition 
could  be  made  to  the  product,  industry  would  be  conducted 


RENT  289 

upon  a  few  most  favored  sites  until  this  absolute  limit  of 
productivity  were  reached.  A  Httle  land  of  the  next 
inferior  quahty  would  then  be  utihzed,  the  marginal  cost 
of  production  would  necessarily  rise  on  account  of  the 
inferior  conditions  under  which  the  additional  supply 
of  each  commodity  must  be  obtained,  and  the  superior 
lands  would  begin  to  bear  a  rent  proportional  to  the  advan- 
tages which  they  afforded  as  compared  with  lands  of  the 
second  grade.  If  this  were  the  actual  case,  rent  would 
be  due  simply  to  differences  in  the  fertihty  or  situation 
or  other  quahties  of  the  various  tracts  of  land  that  pro- 
ducers were  compelled  to  use. 

But  from  our  study  of  the  law  of  diminishing  returns 
(§  43)  we  know  that  the  product  obtained  from  a  given 
tract  cannot  be  increased  proportionally  by  investing 
additional  labor  and  capital  after  a  certain  point  has 
been  reached.  From  this  it  follows  that  rent  would  be 
paid  even  if  all  land  were  equally  productive,  provided 
that  the  demand  could  not  be  satisfied  without  investing 
labor  and  capital  beyond  the  point  of  diminishing  returns. 
This  may  be  shown  by  an  assumed  case. 

Suppose  that  a  certain  community  has  supplied  itself  with 
wheat  by  cultivating  1000  acres  of  the  very  best  land,  all 
equally  productive,  from  which  is,ooo  bushels 

\       .        ,  Illustration. 

were  obtamed  at  a  cost  of  $5000  for  capital  and 
labor.  The  cost  of  production  would  be  2)2)^  cents  per 
bushel,  and  this  would  be  the  normal  price  of  wheat. 
But  the  growth  of  numbers  now  increases  the  price  obtain- 
able for  15,000  bushels,  so  that  additional  labor  and 
capital  are  invested  in  this  branch  of  industry.  Accord- 
ingly $2000  more  is  invested  in  cultivating  the  best  lands. 


290 


THE  DISTRIBUTION  OF  WEALTH 


already  in  use;  and  it  is  found  that,  as  the  investment 
increases  from  $5000  to  $7000,  the  product  rises  from 
15,000  to  not  more  than  20,000  bushels.  Evidently  the 
additional  5000  bushels  have  been  obtained  at  a  cost  of 
$2000,  or  40  cents  per  bushel,  on  account  of  the  operation 
of  the  law  of  diminishing  returns;  and  the  price  of  wheat 
must  advance  to  this  figure,  if  the  supply  is  to  remain  as 
large  as  20,000  bushels.^  At  this  new  price,  it  would 
be  possible  to  bring  into  cultivation  a  second  grade  of 
land  upon  which  $2000  of  capital  and  labor  would  pro- 
duce 5000  bushels,  as  much  as  could  be  secured  by  the 
additional  investment  upon  the  superior  tract.  Thus 
the  operation  of  the  law  of  diminishing  returns  would 
extend  cultivation  from  the  better  to  the  poorer  lands 
long  before  the  absolute  limit  of  productivity  of  the  former 
had  been  reached. 

In  this  illustration  the  owners  of  the  best  grade  of  wheat 
land  will  receive  a  rent  as  soon  as  the  demand  for  wheat 
Illustration  forccs  the  investment  of  capital  beyond  the 
{conunuedv  pgint  of  diminishing  returns.  Whether  the 
additional  supply  is  obtained  by  added  investments  upon 
the  older  land  or  by  bringing  new  into  cultivation,  the 
rent  arises  from  the  facts  that  the  marginal  cost  has 
advanced  to  40  cents,  and  that  15,000  bushels  can  be 
produced  upon  the  more  favored  tract  at  a  cost  of  Ty-^\ 

^  The  question  may  be  asked,  why  need  the  price  advance  so  far  as  40 
cents  ?  The  20,0CX3  liushels  now  produced  cost  but  ^7000,  and  a  price  of 
35  cents  will  cover  the  average  cost  of  production.  But  with  wheat  at  35 
cents,  producers  would  find  it  more  profitable  to  produce  15,000  than 
20,000  bushels.  The  former  would  cost  ^5000  to  produce,  and  would  sell 
for  ^5250,  yielding  a  rent  of  $250  above  their  cost.  This  surplus  would 
be  thrown  away  if  $7000  should  be  expended  in  raising  20,C500  bushel* 
which  would  sell  for  no  more  than  ^7000. 


cents.  If  the  demand  continues  to  rise,  the  marginal 
cost,  either  of  added  investments  upon  the  better  lands 
or  of  cultivating  a  still  inferior  grade,  would  once  more 
increase,  and  rents  would  advance  to  a  higher  figure. 
In  all  cases,  it  is  the  law  of  diminishing  returns,  and  not 
the  fact  that  the  absolute  limit  of  productivity  is  reached, 
which  forces  up  the  marginal  cost  of  production  and  en- 
ables those  persons  who  cultivate  superior  lands  to  gain  a 
surplus,  or  rent,  over  and  above  what  they  have  expended 
for  labor  and  capital.  And  this  is  as  true  of  factory  sites 
or  city  lots  as  it  is  of  land  used  for  agricultural  purposes. 

It  appears,  then,  that  rent  emerges  as  a  share  in  distri- 
bution as  soon  as  the  demand  for  the  products  of  the  land 
becomes   so   great   as   to   make   it    profitable, 

.  Conclusion. 

and  therefore  necessary,  to  mvest  labor  and 
capital  upon  the  best  tracts  beyond  the  point  of  dimin- 
ishing returns,  or  to  resort  to  inferior  situations.  If  the 
former  course  is  followed,  the  amount  of  rent  is  measured 
by  the  difference  between  the  product  of  the  earlier  and 
the  later,  or  marginal,  investments  upon  the  same  land; 
if  the  latter  is  adopted,  rent  may  be  measured  by  the 
difference  in  the  productivity  of  investments  upon  better 
and  upon  poorer  grades  of  land.  In  both  cases  it  arises 
from  the  fact  that  the  various  parts  of  the  supply  are 
jjroduccd  at  varying  costs,  and  that  the  earlier  and  more 
{productive  investments  yield  a  surplus  over  the  labor  and 
capital  expended. 

§  195.  It  follows  from  what  has  already  been  said 
that  rent,  even  a  high  rent,  is  not  a  cause  of  higher  prices, 
but  is  caused  by  them.  If  the  demand  for  a  commodity 
exceeds  the  supply  that  can  be  obtained  under  the  most 


292  THE  DISTRIBUTION  OF  WEALTH 

favorable  conditions  without  pushing  investments  beyond 
the  point  of  diminishing  returns,  the  marginal  cost  of  pro- 
„    ^    ^         duction  and  the  normal  price  must  rise.    Before 

Rent  not  a  ^ 

cause  of  high    this  occurs  land  can  command  no  rent,  since 

prices. 

an  eligible  location  can  be  had  for  nothing; 
after  it  happens,  the  surplus  earnings  of  the  investments 
on  superior  lands  fall  to  the  landowner,  but  as  a  result 
of  the  higher  prices.  This  proposition  has  proved  a 
stumbhng  block  to  man}'  students,  and  seems  to  be  an 
affront  to  common  sense.  Every  business  man  knows 
that  his  rent  figures  among  the  expenses  that  must  be 
met  out  of  the  proceeds  of  his  enterprise,  and  from  this 
fact  he  often  infers  that  it  is  a  factor  in  the  marginal  cost 
of  production  upon  which  the  normal  price  of  a  commodity 
depends.  It  is  not  to  be  doubted  that  a  man  who  hires 
a  lot  of  land  must  recover  the  rent  out  of  the  price  received 
from  his  goods;  but  the  proposition  is  that  the  price 
which  he  receives  is  not  affected  by  that  fact.  He  agrees 
to  pay  the  rent  because  he  considers  that  the  advantages 
of  the  location  will  enable  him  to  do  such  a  large  business, 
or  do  the  same  amount  at  such  a  reduced  cost,  that  he  can 
afford  to  pay  what  the  landowner  demands.  If  his  rent 
were  remitted,  he  would  not  sell  his  goods  for  less,  since 
the  demand  warrants  the  present  price,  and  supply  and 
demand  would  not  be  equalized  at  a  lower.  If,  through 
a  mistake,  he  agrees  to  pay  more  than  the  price  of  his 
product  enables  him  to  recover,  his  only  remedy  is  to 
seek  a  less  expensive  location;  for  the  competition  of 
other  producers  will  not  allow  him  to  raise  his  prices.* 

^  A  manufacturer  of  clothing  who  locates   his   establishment  in  New 
Vork  does  not  expect  to  charge  a  higher  price  because  his  rent  is  higher 


RENT  293 

§  196.  Unlike  interest  and  wages,  rent  is  not  a  pay- 
ment for  sacrifices  which  the  recipient  makes  in  order  to 
assist    production.     The     landowner     neither 

'^         _  _  Rent  an 

produces  his  land,  nor,  as  landowner,  assists  unearned 
in  the  active  conduct  of  industry,  although 
he  may,  as  capitalist  or  laborer,  be  actively  employed 
and  suitably  rewarded  for  such  efforts.  For  this  reason 
rent  has  been  termed  an  unearned  income,  and  the  justice 
of  allowing  private  individuals  to  receive  it  has  been  called 
in  question.  This  subject  will  require  further  attention 
when  we  discuss  the  merits  of  what  is  known  as  the  single 
tax ;  for  the  present,  we  must  content  ourselves  with  point- 
ing out  that  great  care  should  be  observed  in  applying 
the  proposition  that  rent  is  an  unearned  income. 

The  landlord,  of  course,  does  not  produce  his  land 
and  does  not  labor  in  order  to  obtain  his  rent.  Yet  if 
he  has  been  a  pioneer  in  a  new  country,  the  a  needed 
increased  value  of  his  land  after  a  new  and  <=^"'^"''i- 
prosperous  community  grows  up  about  him,  may  be 
regarded  as  no  more  than  an  adequate  compensation 
for  the  labors  and  hardships  of  earlier  days.  The 
capitalist  who  develops  a  suburban  district  and  induces 
people  to  purchase  house  lots  from  him,  takes  consider- 
able risks  when  he  invests  capital  in  the  improvements 
that  are  needed  to  attract  customers.  At  present,  a  part 
of  his  remuneration  from  such  ventures  comes  from  the 

than  it  would  have  been  in  a  smaller  city;  in  fact,  competition  of  pro- 
ducers in  smaller  cities  would  not  enable  him  to  charge  more.  He  locates 
in  New  York,  and  agrees  to  pay  a  higher  rent,  jjecause  the  advantages 
which  that  city  affords  for  his  industry  enaijle  him  to  produce  his  goods 
cheaply  and  to  pay  his  rent  while  selling;  at  the  same  price  as  CQnipetiton 
io  other  cities. 


294  THE  DISTRIBUTION  OF   WEALTH 

increase  of  land  values  that  will  accrue  to  him  if  his  plans 
are  successful.  It  cannot  be  admitted,  therefore,  that 
all  increase  in  the  rental  value  of  land  is  to  be  considered 
an  unearned  income,  in  the  sense  that  it  is  in  no  vv^ay  the 
reward  for  services  or  sacrifices  of  the  recipient. 

Yet  in  all  progressive  urban  communities,  it  cannot  be 
questioned  that  the  steady  growth  of  population  increases 
Urban  land  ^he  rental  value  of  city  lots  without  effort  or 
values.  appreciable  risk  on  the  part  of  the  owners. 

As  John  Stuart  Mill  observed,  "The  ordinary  progress 
of  a  society  which  increases  in  wealth,  is  at  all  times  tending 
to  augment  the  incomes  of  landlords;  to  give  them  both 
a  greater  amount  and  a  greater  proportion  ^  of  the  wealth 
of  the  community,  independently  of  any  trouble  or  outlay 
incurred  by  themselves.  They  grow  richer  as  it  were 
in  their  sleep,  without  working,  risking,  or  economizing." 
In  the  city  of  Boston,  for  instance,  the  assessors'  valua- 
tions show  that,  between  1888  and  1903,  the  total  site 
value  of  land  increased  from  $328,000,000  to  $594,000,000 
on  account  of  the  steady  rise  in  the  annual  rent  that  it 
would  yield;  and  it  would  hardly  be  claimed  that  this 
enormous  increment  of  value  was  offset  by  equivalent 
services  rendered  or  risks  incurred  by  the  landlords. 

Finally,  it  should  not  be  forgotten  that  the  increased 
rent  which  land  bears  as  a  result  of  social  progress  can 
Final  consid-  be  considered  an  unearned  income  only  for 
erations.  ^-j^g  original  owner,  and  not  for  a  subsequent 
purchaser.     A    man    who    pays    $100,000,    accumulated 

1  In  a  subsequent  chapter  (§  223),  we  shall  see  that  it  is  by  no  means 
certain  that  landlords  receive  'i  a  greater  proportion  "  of  the  income  01 
wealth  of  the  community.  


PROFITS  295 

out  of  the  past  earnings  of  his  labor  and  capital,  for  land 
that  yields  an  annual  income  of  $5000,  cannot  be  said  to 
enjoy  an  unearned  income  —  at  least  in  the  ordinary 
meaning  of  that  term.  In  respect  of  the  future  increase 
of  the  rent  which  his  land  will  bear,  his  situation  will  be 
different;  but  any  income  acquired  by  paying  its  capital- 
ized value  is  not  to  be  considered  unearned. 

V.  Profits 

§  197.  We  have  already  seen  that  in  any  industry  the 
superior  establishments  supply  the  commodity  for  less 
than   the   marginal   cost   of  production;    and 

^  r  '  Profits. 

that,  for  this  reason,  they  secure  a  surplus 
return  over  and  above  the  amount  expended  for  labor 
and  capital.  When  this  superiority  is  due  to  the  fact 
that  the  business  has  been  organized  and  conducted  with 
exceptional  skill  and  good  fortune,  the  surplus  falls  to 
the  entrepreneur  and  is  to  be  regarded  as  the  profit  that 
accrues  to  his  skill  and  enterprise.  Although  it  resembles 
rent  in  many  respects,  it  can  in  no  sense  be  considered  an 
unearned  income. 

As  the  term  is  here  employed,  profit  means  the  net 
jjroceeds  of  an  entcrj;rise  after  all  obligations  have  been 
met  and  a  suitable  remuneration  has  been  Gross  and 
received  by  the  labor  and  cajjilal  invested,  net  profits. 
It  is  to  be  distinguished  with  care  from  the  gross  profits 
of  a  business  which  will  usually  include  interest  upon 
the  capital  or  wages  for  the  services  of  the  manager. 
Profits  are  the  reward  purely  for  the  risk  and  enterprise 
i)f  the  man  who  assumes  the  responsil)ility  of  establishing 
and  conducting  a  business  undertaking.     Such  a  person 


296  THE  DISTRIBUTION  OF  WEALTH 

engages  to  pay  stipulated  sums  for  rent,  interest,  and 
wages  even  though  his  books  show  a  loss  at  the  end  of 
the  year;  and  upon  him  the  dangers  of  failure  primarily 
fall,  since  his  creditors  can  lose  only  when  the  results 
have  been  so  disastrous  as  to  more  than  wipe  out  the 
entrepreneur'' s  own  capital.  Unsuccessful  business  men 
fail  to  meet  their  obligations  and,  becoming  bankrupt, 
are  constantly  being  forced  out  of  the  field  of  industry. 
By  this  process  inefficient  men  are  eliminated,  and  the 
control  of  labor  and  capital  is  placed  in  the  hands  of  those 
who  can  employ  them  to  the  best  advantage.  Risk, 
therefore,  is  a  very  important  factor  in  the  organization 
of  industry,  and  the  person  who  assumes  this  burden 
must  be  suitably  rewarded. 

At  present  the  reward  which  lures  men  to  exchange 
the  assured  income  of  the  hired  laborer  or  lender  of  capital 
Pr  fit  th  ^°^  ^^^  uncertainties  of  business  management 
remuneration   is  the  profit  that  may  be  gained  in  case  goods 

for  enterprise.  i  1    r        1  1 

can  be  produced  for  less  than  the  price  nor- 
mally obtained  for  them.  Upon  his  ability  to  produce  a 
commodity  for  less  than  it  costs  the  marginal  producer  to 
make  it,  the  success  of  the  entrepreneur  depends;  and 
though  nothing  is  guaranteed  him,  his  gains  may  be 
enormous.  To  some  men  the  mere  excitement  of  such 
a  venture  appeals  strongly,  while  with  others  the  greater 
freedom  of  the  entrepreneur s  position  or  the  love  of 
mastery  is  the  stronger  consideration.  But  without  the 
prospect  of  a  substantial  gain  in  case  of  success,  no  one 
would  exchange  the  assured  income  of  the  laborer  or 
capitalist  for  the  hazards  assumed  by  the  active  business 
manager. 


PROFITS  297 

It  will  be  observed  that  we  have  assumed  that  the  mar- 
ginal producers  receive  no  profits,  and  obtain  merely  cur- 
rent rates  of  interest  and  wages  for  such  capital  Marginal 
and  labor  as  they  themselves  supply.  Their  in-  ceives^nV^ 
comes  are  often  called  profits ;  but  when  this  is  promts, 
done,  it  is  necessary  to  apply  some  quahfying  adjective  to 
the  profits  obtained  by  employers  of  superior  ability,  and 
to  call  the  latter  pure  or  net  profits.  In  this  discussion, 
however,  we  shall  apply  the  word  "  profits  "  only  to  the  sur- 
plus earnings  of  superior  producers,  and  shall  consider  that 
marginal  producers  receive  only  such  interest  or  wages 
as  they  may  earn.  That  they  can  obtain  nothing  more 
is  due  to  the  fact  that,  although  a  man  will  not  embark 
in  an  enterprise  without  the  prospect  of  such  rewards  as 
superior  producers  obtain,  he  will  be  likely,  after  his 
investment  has  once  been  made,  to  continue  in  the  busi- 
ness even  though  he  receives  nothing  more  than  ordinary 
interest  and  wages.  The  result  is  that,  at  a  price  which 
covers  the  marginal  cost  for  capital  and  labor,  a  suiTicient 
supply  will  be  furnished  to  meet  the  demand,  so  that  the 
normal  price  cannot  be  high  enough  to  yield  a  profit,  in 
the  sense  in  which  we  employ  the  term,  to  the  marginal 
producer. 

The  reason  why  marginal  entrepreneurs  will  continue 
to  produce  goods  upon  terms  that  would  never  have  induced 
them  to  establish  their  undertakings,  is  not  Reasons  for 
difficuh  to  explain.  Capital  once  invested  this  fact, 
cannot  be  withdrawn  without  more  or  less  loss,  and  it 
may  be  better  to  receive  a  normal  rate  of  interest  than  to 
lose  part  of  the  principal  ;  moreover,  if  a  considerable 
amount  of  the  capital  has  been  borrowed,  the  closing  of 


298  THE  DISTRIBUTIOIV  OF  WEALTH 

the  doors  of  the  factory  might  mean  bankruptcy.  But 
in  addition  to  this,  it  should  be  observed  that  an  enire- 
preneur  who  to-day  is  receiving  nothing  more  than  ordi- 
nary interest  and  wages  hopes  for  better  times;  and  it 
happens  not  infrequently  that  increased  exertion  on  his 
part,  or  a  favorable  turn  of  fortune,  places  him  in  a  posi- 
tion where  he  is  no  longer  a  marginal  producer  and  begins 
to  receive  profits.  Then,  too,  so  long  as  he  can  live  upon 
the  interest  and  wages  that  he  obtains,  the  average  man 
seems  to  prefer  to  conduct  a  business  of  his  own  rather 
than  to  become  a  hired  laborer.  These  reasons,  w^ith 
others  that  are  less  important,  explain  the  fact  that  an 
adequate  supply  of  goods  will  be  forthcoming  at  a  price 
that  leaves  no  profit  to  the  entre preneur  who  is  on  the 
margin  of  production, 

§  198.  Obviously  the  amount  of  profits  received  by 
the  more  favored  establishments  depends  on  the  degree 
Tbc  amount  of  Superiority  which  they  enjoy  over  the  mar- 
of  profits.  ginal  producer.  This  advantage  may  arise 
from  greater  organizing  and  financial  skill,  which  often 
make  all  the  difference  between  a  profit  and  a  loss  upon 
a  year's  transactions.  The  possession  of  superior  patents 
may  account  for  the  ability  to  produce  at  a  lower  cost: 
for,  as  Mr.  Mill  remarks,  "If  the  value  of  the  product 
continues  to  be  regulated  by  what  it  costs  to  those  who  are 
obliged  to  persist  in  the  old  process,  the  patentee  will  make 
an  extra  profit  equal  to  the  advantage  which  his  process 
possesses  over  theirs."  Then,  too,  it  cannot  be  doubted 
that  mere  good  fortune  is  an  important  factor  in  deter- 
mining the  amount  of  profits  that  an  entrepreneur  receives 
in  any  particular  year,   although  it  cannot  account  for 


PROFITS  299 

the  success  which  many  establishments  achieve  over 
long  periods  of  time.  Finally,  industry  and  integrity 
count  as  heavily,  here  as  elsewhere,  in  favor  of  the  persons 
who  possess  these  cardinal  \irtues;  and  they  have  a 
commercial  value  that  is  despised  by  no  one  who  has 
studied  the  conditions  of  permanent  business  success. 

§  199.  The  profits  of  the  entrepreneur,  unlike  interest 
and  rent,  are  usually  of  a  personal  nature,  and  often  of 
a  decidedly  temporary'  character.  They  fre-  profits  a  per- 
quently  depend  upon  the  life  and  health  of  sonai  income. 
a  single  man;  and  even  when  caused  by  less  transitory 
advantages,  they  can  be  preserved  only  at  the  price  of 
eternal  vigilance.  Success,  itself,  may  destroy  them  since 
It  may  induce  a  feeUng  of  security  and  lead  to  a  relax- 
ation of  the  efforts  upon  which  its  own  continuance 
depends.  Then^  too,  fresh  talent  and  more  youthful 
energy  are  constantly  invading  the  field,  inefficient  pro- 
ducers are  continually  forced  out  of  the  business  by  such 
competition,  and  the  marginal  cost  of  production  steadily 
falls.  Efficiency  that  yields  a  large  profit  to-day,  may 
to-morrow  give  an  establishment  but  a  slight  advantage 
over  the  marginal  producer ;  and  when  competition 
prevails,  nothing  can  be  considered  assured  except  that 
it  is  always  necessary  to  keep  abreast  of  the  latest  develop- 
ments in  the  industry.  In  this  respect  profits  differ,  to  a 
marked  degree,  from  the  surplus  which  goes  to  the  land- 
owner in  the  form  of  rent. 

It  follows  from  what  precedes  that  profits  arc  a  surplus 
of  wealth  saved  by  the  superior  managers  of  proatsa 
industry  in  the  process  of  producing  a  commod-  ^"'■p'"^- 
hy  which   would  have  required  a  larger  expenditure  of 


300  THE  DTSTRIBUTION  OF  WhALTh 

labor  and  capital  under  less  efficient  leadership,  The^ 
are  obtained  by  selling  goods  it  prices  that  do  nu.  exceed 
the  marginal  cost  of  production,  and,  like  rent,  do  not  affect 
the  value  of  a  commodity.  Prices  jould  be  no  lower, 
but  labor  and  capita^  vould  be  wasted,  if  there  were  no 
entrepreneurs  of  an  ib'iity  superior  to  that  jf  the  marginal 
producer.  For  this  reason,  when  competition  exists, 
"anger  at. the  great  captains  of  industry  on  account  of 
the  pure  profits  which  they  acquire  is  not  only  groundless, 
but  insane.  Rather  it  is  the  stupid  and  unsuccessful 
undertakers  whj-  deserve  blame,  sinking  capital  and 
starving  laborers." 

FOR   SUPPLEMENTARY   STUDY 

General:  Bullock,  Selected  Readings  in  Economics,  513-588, 
Hadley,  Economics,  264-335  \  Marshall,  Economics ;  Sea- 
GER,  Introduction  to  Economics;  Taussig,  Principles  of  Eco- 
nomics, Bk.  V. 

vSpecial:  Carver,  The  Distribution  of  Wealth;  Clark,  The  Dia- 
tribution  of  Wealth ;  Taussig  Waives  and  Capital. 

QUESTIONS 

1.  What  is  the  importance  of  the  place  occupjed  by  the  em- 
ployer in  distribution  ? 

2.  Whac  part  does  the  marginal  investor  play  in  determining 
the  rate  of  interest  ? 

3.  How  and  why  does  the  standard  of  hving  afifect  wages? 

4.  What  have  diminishing  returns  to  do  with  the  rent  of.land  ? 

5.  Why  is  high  rent  not  a  cause  of  high  prices  ? 

6.  Why  does  the  fact  that  the  marginal  producer  receives  no 
profits  not  deter  men  from  establishing  business  enterprises  ? 


CHAPTER  Xin 

THE   LABOR   PROBLEM 
I.  The  Labor  Contract 

§  200.  The  hired  laborer  sells  his  services  to  an  em- 
ployer for  a  stipulated  wage.  In  the  view  of  the  law,  his 
labor  is  his  property,  and  the  agreement  by  Labor  a 
which  he  disposes  of  it  is  similar  to  any  other  commodity. 
contract.  Legally,  as  well  as  economically,  labor  is  a  com- 
modity which  the  possessor  has  a  right  to  sell  in  the  best 
market  obtainable.  In  the  United  States  both  the  federal 
and  the  state  constitutions  contain  various  provisions  that 
guarantee  to  citizens  the  right  to  make  contracts  for  the 
disposal  of  their  property,  and  prevent  legislative  bodies 
from  enacting  laws  that  destroy  such  freedom  of  contract. 
Our  courts,  moreover,  generally  insist  that  these  consti- 
tutional guarantees  shall  be  rigidly  observed ;  and  they 
often  set  aside,  as  unconstitutional,  laws  that  undertake 
to  prevent  certain  contracts  from  being  made  between 
employers  and  employees. 

§  20I.    Nevertheless,  though  labor  thus  resembles  a 
commodity,  it  differs  from  what  is  ordinarily  considered 
a  commodity  in  important  respects.     These  But  with 
differences  are  so  great  as  to  raise  the  question   pe^uari- 
whether  it  should  be  classed  as  a  commodity  *'^^- 
at  all.     The  United  States  Congress,  in  an  act  relating 

301 


302  THE  LABOR  PROBLEM 

to  monopolies  and  unlawful  restraints  of  trade,  has  de- 
clared that  "the  labor  of  a  human  being  is  not  a  com- 
modity or  article  of  commerce."  This  is,  of  course, 
simply  a  matter  of  defhiition.  For  purposes  of  economic 
analysis  it  is  convenient  to  regard  labor  as  a  commodity 
which,  however,  presents  certain  pecuharities.  It  is 
just  these  peculiarities  which  have  given  rise  to  a  labor 
problem. 

In  the  first  place  the  laborer  and  his  labor  are  in- 
separable, and  if  labor  is  classed  as  a  commodity  there 
The  laborer  is  danger  that  unthinking  people  may  class  the 
faborln-  laborer  as  a  commodity  also.  The  free  laborer 
separable,  jg  j^q|-  ^  commodity,  a  means  to  an  end,  but  is 
one  of  the  persons  for  whom  commodities  are  produced. 
Moreover,  because  of  this  inseparableness  of  the  laborer 
from  his  labor,  the  person  who  sells  labor  is  vitally  inter- 
ested in  the  manner  in  which  the  buyer  utilizes  his 
purchase.  This  is  not  ordinarily  the  case  with  the 
seller  of  commodities.  "It  matters  nothing  to  the  seller 
of  bricks  whether  they  are  to  be  used  in  building  a  palace 
or  a  sewer;  but  it  matters  a  great  deal  to  the  seller  of 
labor,  who  undertakes  to  perform  a  task  of  given  diffi- 
culty, whether  or  not  the  place  in  which  it  is  to  be  done 
is  a  wholesome  and  a  pleasant  one,  and  whether  or  not 
his  associates  will  be  such  as  he  cares  to  have."  The 
employer  cannot  utilize  the  labor  he  has  purchased  apart 
from  the  laborer  who  sells  it.  He  usually  determines 
the  place  of  work,  and  sometimes  even  the  residence  of 
the  laborer ;  he  has  more  or  less  control  over  the  asso- 
ciates of  a  workman  ;  and  upon  him  depend  many  things 
that  affect  vitally  the  welfare  of  the  employee,  such  as 


THE  LABOR   CONTRACT  303 

the  hours  of  work,  sanitary  conditions,  and  safety  of  life 
or  limb.  Under  such  circumstances  there  is  far  more 
opportunity  for  ill-will  and  serious  friction  between 
the  parties  to  an  exchange  than  there  can  be  in  con- 
tracts for  the  sale  of  other  commodities. 

In  the  next  place,  labor  is  more  like  a  perishable  than 
a  durable  commodity,  since  there  is  often  a  certain  ele- 
ment of  compulsion  in  its  sale.  The  hired  compulsion 
laborer  commonly  has  little  or  nothing  upon  *°  ^^^  ^^^°''- 
which  he  can  fall  back  for  support,  so  that  he  must 
dispose  of  his  labor  at  once  for  whatever  price  can 
be  obtained ;  whereas  "the  seller  of  other  goods,  by  the 
very  fact  that  he  has  them  to  sell,  has  some  capital  upon 
which  he  can  live  while  he  is  trying  to  make  a  satisfactory 
contract."  ^Moreover,  poverty  and  ignorance  may  pre- 
vent a  man  from  offering  his  labor  in  the  most  favorable 
market,  and  compel  him  to  sell  it  in  one  that  is  already 
glutted.  When  such  conditions  are  taken  into  account, 
it  is  obvious  that  the  person  who  offers  labor  in  ex- 
change for  daily  wages  is  not  infrequently  in  a  less 
favorable  position  than  the  seller  of  other  commodities. 

A  third  peculiarity  is  connected  with  the  one  first  men- 
tioned :  the  supply  of  labor  changes  very  slowly,  and 
only  through  changes  in  the  number  of  laborers.   ^^ 

-'  '^  "  ^   _  The  supply 

The  supply  of  other  commodities  can  be  de-  of  labor 

,   ,  .  ,         .  ,  ,     .     f        changes  m 

creased  by  stopping  i)ro(luction  ;   but  it  is  tar  a  peculiar 

1  I  1  11-11  manner. 

less  easy  to  decrease  the  number  ol  laborers 
when  falling  prices  lead  to  a  partial  suspension  of  i)ro(luc- 
tive  industry  and  throw  many  men  out  of  employment. 
When  a  decreased  demand  for  labor  causes  low  wages  and 
lack  of  employment,  large  numbers  of  unemployed  laborers 


304  THE  LABOR  PROBLEM 

press  into  the  market  and  bid  for  work.  Thus  a  decreased 
demand  may  bring  an  increased  supply  of  labor  into  the 
market.  On  the  other  hand,  when  demand  begins  to 
increase  after  a  period  of  hard  times  and  low  wages,  a 
"  reserve  army  "of  unemployed  laborers,  "which  the  poor- 
houses  at  the  expense  of  the  whole  population  had  sup- 
ported ...  as  long  as  dullness  in  the  business  continued," 
presses  into  the  labor  market  and  increases  the  supply. 

When  due  importance  is  assigned  to  the  peculiarities 

which  labor  presents,  it  is  clear  that  there  must  often 

be  less  actual  freedom  in  a  contract  for  its  sale 

Summary. 

than  in  that  for  the  sale  of  most  other  things. 

Legally  the  laborer  may  do  as  he  pleases ;  but   as  a 

matter  of  fact,  he  often  has  no  alternative  and  must 

accept  any  terms  that  are  offered.     When  a  woman  or 

child  or  one  of  a  struggling  crowd  of  men  at  a  factory 

gate,  stands  before  the  employer  who  represents  a  capital 

of  a  million  dollars,  there  is  little  real  equality  in  the 

terms  upon  which  bargaining  proceeds ;  and,  for  this 

reason,  efforts  have  been  made  to  improve  the  conditions 

of  employment  by  legislation  and  the  formation  of  labor 

organizations. 

n.  Labor  Legislation 

§  202.   The  growth  of  the  factory  system  in  England, 

as  the  result  of  the  Industrial  Revolution,  partly  produced 

and  partly  brought  to  light  a  multitude  of 

factory  evils  that  called  for  some  effectual  remedy. 

legislation.  ,        ,  . 

Early  m  the  mneteenth  century  women  and 
children  were  employed  in  factories  and  mines  under 
conditions  that  were  destructive  of  body  and  soul ;  for 
all  operatives  the  hours  of  labor  were  prolonged  beyond 


LABOR   LEGISLATION  305 

human  endurance,  and  little  or  no  care  was  taken  to 
protect  workmen  from  the  most  dangerous  accidents.  In 
1802  Parliament  passed  the  first  of  a  series  of  factory 
acts,  which,  while  nominally  restricting  the  laborer's 
freedom  of  contract,  have  gradually  effected  a  material 
improvement  in  his  condition.  As  systematized  and  ex- 
tended since  1878,  these  laws  now  prohibit  the  employ- 
ment of  children  under  a  certain  age,  and  limit  the  hours 
that  women  and  children  can  be  employed  in  various 
industries ;  moreover,  they  enforce  suitable  ventilation 
and  the  proper  sanitation  of  factories,  and  require  that 
safety  appliances  shall  be  used  whenever  dangerous 
machinery  is  employed.  The  factory  acts  applied  at 
first  only  to  women  and  children,  and  at  present  interfere 
less  with  labor  contracts  made  by  adult  males  than  with 
those  of  other  classes  of  laborers ;  yet  in  a  number  of 
instances  restrictions  have  been  imposed  upon  callings 
that  are  followed  chiefly  or  exclusively  by  men. 

Another  form  of  labor  legislation  of  growing  impor- 
tance is  designed  to  protect  laborers  in  case  of  accident, 
sickness,  and  -unemployment,  and  against  de- 
pendence in  old  age.     In  this  type  of  legis-  for  accident, 
lation  Germany  was  the  pioneer.     The  form  unemploy 
there  taken  was  that  of  compulsory  insurance.  ™  g"*'  °^*^ 
To  provide  for  accident,  all  employers  of  labor 
are  required  to  form  insurance  associations  to  which  a 
weekly  contribution  is  made  for  each  laborer  employed. 
The  fund  thus  collected  assures  to  the  laborer  medical 
and  hospital  aid  and  a  weekly  benefit  while  incapacitated. 
In  case  of  sickness,  the  payment  of  the  premium  is  made 
obligatory  upon  the  employer,  but  he  may  deduct  two 


3o6  THE  LABOR   PROBLEM 

thirds  of  the  premium  from  wages.  In  the  case  of  the 
provision  for  old  age,  he  may  deduct  one  half  of  the 
premium.  The  state  also  makes  a  contribution  to  the 
old  age  pensions  out  of  the  imperial  treasury. 

England  accomplishes  the  same  results  by  somewhat 
different  methods.  Old  age  pensions  are  paid  directly 
English  from  the  g-eneral  revenues  of  the  state.  Em- 
legisiation.  pjoyers  are  made  liable  to  a  specific  payment 
in  case  of  accident,  but  the  form  of  insurance  they  may 
adopt,  or,  indeed,  whether  they  adopt  any  form  of  insur- 
ance at  all,  to  cover  this  Hability,  is  left  to  their  option. 
In  practice  they  generally  insure  in  private  companies 
organized  for  this  purpose.  Sickness  is  provided  for, 
as  in  Germany,  by  compulsory  contributions  to  an  in- 
surance fund  from  employers  (a  part  of  which,  as  in 
Germany,  may  be  deducted  from  wages),  and  England 
has  recently  made  a  new  departure  in  the  way  of  in- 
surance against  unemployment.  The  employer  pays 
the  premiums,  deducting  one  half  from  wages;  the 
state  adds  to  each  premium  a  certain  proportion  of 
its  amount;  labor  exchanges  are  opened  throughout 
the  country,  to  which  unemployed  workmen  must  report 
daily  and  where  they  must  accept  suitable  employment 
when  offered.  But  until  such  employment  is  found  the 
unemployed  laborer  is  paid  a  weekly  benefit. 

Finally  several  countries  have  adopted  the  principle 
of  the  legal  minimum  wage.  The  law  either  establishes 
Minimum  ^  fixed  rate,  or  provides  for  wage  boards  which 
''^se.  are  empowered  to  fix  the  minimum  for  every 

trade  or  industry  after  a  hearing  and  full  investigation 
of  the  merits  of  the  case. 


LABOR  LEGISLATION-  307 

§  203.   The  United  States  was  slow  to  adopt  legislation 
of  the  kinds  described  in  the  last  sections.     This  was 
due  in  part  to  the  intense  individualism  of  our  ^^^  united 
people,  resenting  anygovernmental  interference  states  slow 
with  personal  liberty ;  partly  to  the  fact  that  labor  legis- 

,  .    1  r  1        1     lation. 

because  of  generally  high  wages,  free  land, 
and  a  greater  mobility  of  labor,  the  need  for  such 
legislation  has  until  recently  been  less  acutely  felt ;  and 
partly  to  the  provisions  of  our  federal  and  state  con- 
stitutions, arid  the  peculiar  relations  between  our  federal 
and  state  governments.  The  federal  and  state  constitu- 
tions contain  clauses  pro\'iding  that  no  person  shall 
be  deprived  of  hfe,  liberty,  or  property  without  ^onstitu- 
due  process  of   law.     Not   infrequently  the  tjonai  hin- 

^  ^  ^        ,        drances  to 

courts  have  held  various  forms  of  labor  legis-  labor 

legislation. 

lation  to  be  in  violation  of  the  above  provisions 
and  hence  unconstitutional.     A  man's  labor  is  held  to 
be  his  property,  and  hence  to  limit  the  number  of  hours 
he  may  work  is  to  interfere  with  his  constitutionally 
guaranteed  liberty  and  property  rights. 

On  the  other  hand  it  is  within  the  police  powers  of 
the   state   to   Hmit   Hberty   and   j)r()perty   rights    when 
such  limitation  can  be  shown  to  be  necessary 
for  the  health,  safety,  or  morals  of  its  people,  permissible 
The  courts,  therefore,  arc  charged  with  the  stat*"s 
responsibility  of  deciding  in  any  specific  case  Jo5ver 
whether  the  act  in  question  violates  a  con- 
stitutional right,  or  is  a  permissible  exercise  of  the  police 
j)ower.     As  the  line  of  distinction  is  by  no  means  obvious 
and  must  often  rest  u[)()n   the  i)ers()nal  ojjinion  of  the 
court,  it  is  not  surprising  that  there  is  much  confusion 


308  THE  LABOR  PROBLEM 

and  conflict  in  the  decisions  that  have  been  handed 
down. 

On  the  whole,  with  the  lapse  of  time  and  the  growth 
of  public  opinion,  there  appears  to  be  a  tiend  in  court 
decisions  in  the  direction  of  allowing  greater 
status  of  scope  to  the  police  power  of  the  state  in  the 
decisions  matter  of  labor  legislation.  At  the  present 
labor  kwl  writing  the  courts  have  held  constitutional  laws 
requiring  the  proper  ventilation  and  sanitation 
of  factories,  laws  limiting  the  age  and  hours  with  re- 
spect to  the  employment  of  children,  and  laws  limiting 
the  hours  of  labor  for  women.  In  the  CEise  of  adult 
males  a  legal  limitation  of  hours  will  be  permitted  only 
when  it  can  be  shown  that  long  hours  in  the  specific 
occupation  affected  by  the  law  are  peculiarly  prejudicial 
to  health,  safety,  or  morals.  An  eight  hour  day  for  men 
in  the  mining  industry  was  held  to  be  constitutional  by 
the  supreme  court  of  the  United  States  in  a  Utah  case, 
but  the  same  court  held  a  ten  hour  law  for  bakers  in 
a  New  York  case  to  be  unconstitutional.  Laws  limiting 
the  number  of  hours  for  state  and  municipal  employees 
have  been  allowed.  The  constitutionality  of  acts  pro- 
viding for  what  is  virtually  compulsory  insurance  for 
accident  has  been  assured  by  making  the  law  nominally 
permissive  rather  than  obligatory,  but  denying  the 
''fellow  servant",  "contributory  negligence",  and  "as- 
sumption of  risk"  pleas  to  such  employers  as  failed  to 
insure. 

Even  where  no  constitutional  difficulty  arises,  the 
peculiar  relation  between  the  federal  and  state  juris- 
dictions flowing  from  our  federal  form  of  government 


LABOR  LEGISLATIOAT  309 

presents  an  obstacle  to  labor  legislation.     Authority  to 
enact  such  laws  lies  with  the  states,  but  there  is  nothing 
to  prevent  industries  from  moving  out  of  a  Difficulties 
state  which  has  restrictive  labor  laws  into  one  arising  from 

our  federal 

which  has  not.     And  if  industries  do  so  elect,  form  of 

1  .  I'll  •  1  government. 

the  state  from  which  they  move  is  powerless 
under  the  federal  constitution  to  prevent  them  from  doing 
business  within  its  borders  on  the  same  terms  as  its  own 
citizens  who  are  possibly  handicapped  by  the  labor  laws. 
An  attempt  is  now  being  made  to  cover  this  difficulty 
by  federal  legislation.  Congress  has  no  authority 
under  the  constitution  to  enact  labor  legisla-   . 

An  attempt 

tion  directly  binding  upon  all  the  states,  but  at  federal 
it  may  accompHsh  this  result  indirectly  through 
its  control  over  interstate  commerce.  An  act  has  been 
passed  by  Congress  prohibiting  interstate  commerce 
in  commodities  produced  in  factories  which  employ 
children  under  fourteen  years  of  age,  but  this  was  de- 
clared unconstitutional.  Of  course,  all  of  the  above- 
mentioned  difficulties  in  the  way  of  labor  legislation 
might  be  removed  by  a  constitutional  amendment,  and 
if  the  demand  for  such  legislation  becomes  sufficiently 
insistent  and  the  difficulties  prove  insuperable  by  other 
means,  such  an  amendment  may  sometime  be  adopted. 

Though,  as  before  stated,  labor  legislation  made  little 
headway  for  many  years  in  the  United  States,  pj-ggg^t 
more  recently  progress  has  been  very  rapid,  "^^"*  °^ 
and  perhaps  in  some  states  the  present  danger  legislation 
is   from   hasty  and   inconsiderate  legislation  united 
rather  than  from  backwardness.     Most  of  the 
States  have  passed  factory  agts  recj[uiring  proper  safety 


-jio  THE  LABOR   PROBLEM 

and  sanitary  conditions,  and  regulating  to  a  greater 
or  less  extent  the  conditions  of  employment  for  women 
and  children.  There  have  also  been  laws  directed 
against  truck  payments  and  payments  in  company 
scrip,  some  of  which,  however,  have  been  declared 
unconstitutional.  The  eight  hour  day  for  federal  em- 
ployees and  for  employees  of  private  contractors  when 
filling  contracts  for  the  federal  government  has  been 
secured.  Similar  legislation  has  also  been  secured  for 
state  and  municipal  employees  in  several  of  the  states. 
Several  states  also  have  the  eight  hour  day  for  miners. 
No  state  has  as  yet  attempted  old  age  pensions  or 
compulsory  insurance  against  sickness  and  unemploy- 
ment, though  these  matters  are  being  agitated.  Legisla- 
tion providing  workmen's  compensation  for  accident  is, 
however,  rapidly  spreading, 

§  204.  Before  the  passage  of  these  workmen's  com- 
pensation acts  the  situation  was  very  unsatisfactory. 
Workmen's  Under  the  common  law  a  workman  injured  in 
tkm^^Th^e  ^^^^  course  of  his  employment  could  recover 
common  damages  only  with  the  greatest  difficulty.  He 
must  bring  suit  against  his  employer  —  an  ex- 
pensive and  tedious  process,  and  in  court  the  defense 
could  plead  the  "fellow  servant",  "assumed  risk",  and 
"contributory  neghgence"  doctrines.  That  is,  if  the 
accident  occurred  through  the  negligence  of  a  fellow 
employee  the  injured  workman  had  recourse  only  to 
him  —  an  empty  privilege  —  not  to  the  employer. 
Moreover,  in  accepting  the  position  at  the  stipulated 
wage  he  was  assumed  to  have  taken  into  account  the 
ordinary  risks   of   the   trade.     Finally  he   must  prove 


LABOR   LEGISLATION-  31I 

that  the  accident  had  not  occurred  through  some  care- 
lessness or  negHgence  on  his  own  part.  Virtually,  in 
short,  in  order  to  recover  from  the  employer  he  must 
prove  that  the  accident  was  due  to  some  definite  act  of 
negligence  on  the  employer's  part.  The  result  was  that 
thousands  of  families  were  rendered  destitute  through 
accident  to  the  breadwinner,  and  even  where  the  in- 
jured workman  did  recover  damages  it  was  only  after 
long  delay  and  when  the  greater  part  of  the  award  had 
been  consumed  in  expenses  and  lawyers'  fees.  "The 
statistician  of  the  New  York  Bureau  of  Labor  has  stated 
that  in  1905  the  liability  companies  received  from  em- 
ployers in  the  state  as  premiums,  $4,381,634.  Of  this 
sum  only  thirty-five  per  cent  reached  the  injured  workers 
and  their  families;  sixty-five  per  cent  was  absorbed  by 
the  insurance  companies  in  expenses  and  profits.  About 
one  half  the  amount  granted  to  the  disabled  went  to 
their  lawyers  in  fees.  Consequently  only  about  one 
dollar  in  every  six  dollars  paid  in  premiums  by  em- 
ployers was  actually  available  for  use  by  the  families 
of  the  disabled  employees."  The  theory  of  the  common 
law  was  not  unreasonable  under  the  simple  conditions 
of  industry  in  the  midst  of  which  it  developed,  but  it 
broke  down  when  aj)plied  to  the  present  industrial 
organization.  The  modern  theory  of  workmen's  com- 
pensation is  that  more  substantial  justice  is  done  when 
loss  from  accident,  like  loss  from  fire  or  flood,  The  modern 
is  made  one  of  the  regular  routine  charges  up(^n  *^^°''y- 
the  business,  to  be  met  from  ])rorits,  or,  if  necessary, 
from  the  increased  j)rice  at  which  the  ])ro(iuct  is  sold. 
§  205.    Laws  that  enforce  proper  ventilation  and  sani- 


312  THE  LABOR   PROBLEM 

tation  of  factories,  or  require  adequate  provision  for  the 
safety  of  laborers,  need  at  this  date  no  justification. 
Economic  Few  disinterested  persons  will  question  the 
Taboril^s-  propriety  of  such  regulation  of  the  condi- 
lation.  tions  of  employment.     The  restriction  of  child 

labor  also  requires  no  defense,  even  though  many  of  our 
states  now  fall  far  short  of  performing  their  duty  to  the 
little  victims  of  employers'  greed  or  parental  neglect. 
With  the  hours  that  adults  shall  work,  the  propriety  of 
governmental  interference  is  not  so  generally  conceded. 
Undoubtedly  there  is  a  reasonable  limit  for  the  working 
day ;  but  this  differs  from  industry  to  industry,  accord- 
ing to  the  healthfulness  of  the  work  or  the  intensity  of 
exertion  that  is  required.     For  this  reason  it  is  difficult 
to  establish  a  general  rule.     The  twelve  or  fourteen  hour 
day  of  a  former  generation  is,  beyond  question,  too  long 
for  the  welfare  of  the  worker ;  but  it  is  not  clear  that  nine 
or  ten  hours  is  an  excessive  number  to  require  in  the  aver- 
age occupation,  although  there  are  some  industries  where 
eight  hours,  or  even  less,  are  all  that  should  be  demanded. 
In  the  past,  reductions  in  the  hours  of  labor  from  four- 
teen to  twelve  and  from  twelve  to  ten  have  probably 
increased  the  efficiency  of  the  workman  enough  to  offset 
the  loss  of  working  time.     A  further  reduction  to  nine 
hours,  or  even  to  eight,  may  have  a  similar  effect  in  some 
cases ;  but  in  others  it  probably  decreases  the  product, 
and  ultimately  lowers  the  wages  that  can  be  paid.     A 
uniform  eight  hour  day,  which  is  often  advocated,  may 
yet  be  attainable ;  but  it  can  come,  if  it  is  to  be  reached 
without  reduction  of  wages,  only  by  repeated  experiments 
in  one  industry  after  another,  and  upon  condition  thai 


LABOR   LEGISLATION  313 

the  efficiency  of  the  laborer  increases  pari  passu  with 
the  decrease  of  time  that  he  works.  In  this  connection, 
however,  it  must  be  remembered  that  the  aim  of  economic 
activity  is  the  production  of  utilities,  and  if  workmen 
believe  that  more  leisure  and  less  commodities  repre- 
sent for  them  a  higher  utility  than  a  greater  volume  of 
material  goods  secured  at  the  expense  of  long  hours  and 
fatigue,  they  are  justified  in  endeavoring  to  secure  what 
they  want.  Obviously  in  shortening  the  working  day 
there  are  limits  beyond  which  they  cannot  secure  both. 
In  attaining  this  end,  however,  it  is  desirable  to  invoke 
as  little  as  possible  the  invasion  of  personal  liberty  in- 
volved in  the  law.  Many  workmen  would  perhaps  prefer 
the  longer  hours  and  greater  income  and  their  preference 
should  be  respected.  The  trade  union,  to  be  presently 
considered,  is  probably  a  better  agency. 

In  regard  to  industrial  insurance  the  economic  effect, 
as  in  the  case  of  all  insurance,  is  to  distribute  losses. 
A  small  sacrifice  is  distributed  among  many  industrial 
in  order  to  avert  a  crushing  loss  upon  a  few.  I'lsurance. 
Industrial  insurance  is  to  be  judged  by  its  results  in 
terms  of  human  welfare.  In  forming  such  a  judgment 
it  is  to  be  observed  that  some  forms  of  industrial  in- 
surance undoubtedly  induce  malingering  and  discourage 
individual  self-reUance  and  thrift.  This  is  an  economic 
evil.  On  the  other  hand  many  families  are  saved  from 
economic  degradation  and  the  pauperization  of  charity. 
This  is  an  economic  good.  The  good  must  be  weighed 
against  the  evil. 

In  the  case  of  the  minimum  wage  several  economic 
problems  arise.     The  employer  may   be   compelled   to 


314  THE  LABOR  PROBLEM 

pay  it  to  all  whom  he  employs ;  but  he  cannot  be  com- 
pelled to  pay  it  to  all  who  apply  for  employment,  and  he 
Minimum  will  not  pay  it  unless  it  is  equaled  by  the  value 
^^^^-  of  the  workman's  service.     A  rigidly  enforced 

minimum  wage  is  thus  likely  to  result  in  throwing  out 
of  employment  a  number  of  the  superannuated  and  in- 
competent who  now  earn  something  but  cannot  earn 
the  minimum  wage.  Here  is  clearly  an  economic  loss. 
On  the  other  hand  it  is  not  unlikely  that  there  are  many 
who  are  now  receiving  less  than  the  minimum  wage, 
not  because  of  inefficiency  but  because  of  weakness  in 
bargaining  power.  This  is  especially  true  in  the  so-called 
"sweated"  industries  and  of  women  and  children  in 
general.  The  effect  of  the  law  will  in  this  case  be  to 
relieve  considerate  employers  from  the  competition  of 
rivals  who  are  willing  to  exploil  helpless  women  and 
children.  In  these  cases  also  a  real  economic  advantage 
may  result  from  the  increased  efl&ciency  due  to  the 
worker's  receiving  a  living  wage.  It  would  seem  wise 
to  supplement  a  minimum  wage  law  with  provision 
for  industrial  education  so  that  those  who  receive  less 
than  the  minimum  wage  because  of  incompetence  may 
be  rendered  competent. 

III.   Labor  Organizations 

§  206.   Although  combinations  of  craftsmen  existed  in 

some  English  towns  during  the  eighteenth  century,  the 

,    ,      modern  labor  organization  did  not  make  its 

Growth  of  ° 

labor  organ-  appearance  until   the   Industrial   Revolution 

izations. 

had  prepared  the  conditions  that  were  neces- 
sary for  its  growth.     The  aggregation  of  capital  into  large 


LABOR    ORGANIZATIONS  315 

masses,  one  of  the  most  striking  results  of  the  Revolu- 
tion, tended  to  widen  the  distance  between  employer 
and  employee,  and  to  develop  class  feeling  among  the 
laborers.  In  the  small  workshops  of  former  times,  in 
which  the  employer  worked  with  the  aid  of  a  few  journey- 
men, constant  personal  intercourse  existed ;  while  since 
comparatively  little  capital  was  required  to  establish  an  in- 
dependent enterprise,  the  average  journeyman  could  look 
forward  to  the  day  when  he  should  be  master  of  his  own 
establishment.  But  all  this  was  changed  by  the  growth 
of  the  factory  system.  With  the  hundreds  or  thousands 
of  men  in  his  vast  establishment  the  employer  could  no 
longer  have  that  intimate  intercourse  which  had  served 
so  often  to  promote  good  will  and  to  remove  causes  of 
discontent.  And,  at  the  same  time,  the  enormous  amount 
of  capital  needed  for  a  modern  factory  made  it  impossible 
for  the  average  laborer  to  expect  to  rise  above  his  station 
and  become  an  independent  producer.  Such  conditions 
made  it  inevitable  that,  as  the  distance  between  em- 
jjloyer  and  employee  widened,  laborers  should  resort  to 
common  action  in  order  to  protect  and  advance  the 
interests  of  their  class. 

§  207.  Organization  has  usually  been  effected  through 
combinations  of  workmen  in  the  same  craft  or  trade,  and 
in  this  manner  the  trade  union  has  been  devel-  The  trade 
oped.  It  has  proved  difficult  to  unite  men  "°'°°- 
of  different  trades  into  a  single  association,  since  there 
is  little  community  of  feeling  and  may  be  considerable 
diversity  of  interest  among  llu-m  ;  while  unskilkd  laborers 
are  the  hardest  of  all  to  organize,  jjrobaljly  because  they 
are  usually  of  a  lower  order  of  intelligence  and  are  united 


3l6  THE  LABOR  PROBLEM 

by  fewer  apparent  ties  of  common  interest.  The  result 
is  that  trade  unions,  even  in  seasons  of  greatest  prosperity, 
have  never  represented  more  than  a  fraction  of  the  whole 
body  of  laborers.  At  the  present  moment  there  may 
be  2,800,000  laborers  in  the  various  organizations  that 
exist  in  the  United  States,  but  this  number  is  not  more 
than  one  fifteenth  of  the  whole  body  of  persons  engaged 
in  gainful  employments,  or  more  than  one  twelfth  of  the 
entire  number  of  hired  workers.  But  in  various  indus- 
tries, usually  those  in  which  skilled  labor  is  required,  the 
proportion  is  far  larger,  and  it  sometimes  includes  a 
majority  of  all  the  persons  in  the  trade. 

At  various  times  efforts  have  been  made  to  unite  all 
classes  of  laborers,  including  unskilled  workmen,  in  a 
Knights  of  single  organization.  In  this  country,  the 
Labor.  Knights  of  Labor,  organized  upon  this  basis, 

secured  a  large  membership  between  1883  and  1887, 
increasing  their  numbers  from  about  52,000  in  the 
former  year  to  nearly  1,000,000  in  the  latter.  But 
then  a  reckless  policy  with  respect  to  strikes,  conflicts 
with  trade  unions,  and  a  disposition  to  enter  politics 
brought  about  the  overthrow  of  the  association,  which, 
in  1893,  was  supposed  to  have  but  40,000  paying  mem- 
bers. Its  failure  taught  labor  leaders  the  necessity  of 
organizing  along  trade  lines,  and  during  recent  decades 
the  trade  union  has  again  come  to  the  front. 

The  trade  unions,  however,  have  found  it  desirable 
to  cooperate  for  certain  purposes,  and  have 

Amencan  ^  . 

Federation     established  the  American  Federation  of  Labor, 

of  Labor. 

which,    between    1897    and    1916,    increased 
its  membership  from  265,600  to  2,000,000.     The  federal 


LABOR  ORGAmZATIONS  317 

form  of  organization  has  permitted  each  trade  to  preserve 
its  autonomy,  and  yet  has  made  it  possible  to  cooperate 
for  certain  ends.  Besides  aiding  the  eight  hour  move- 
ment and  advocating  labor  legislation,  the  Federation 
now  keeps  a  considerable  force  of  organizers  in  the  field, 
and  has  had,  in  recent  years,  some  success  in  forming 
unions  of  unskilled  laborers.  Since  1906  it  has  played 
an  active  part  in  politics,  its  policy  being  to  keep  its 
members  posted  as  to  the  way  in  which  members  of 
congress  vote  on  labor  bills  and  to  throw  its  influence 
in  favor  of  the  candidates  whose  records  are  most  favor- 
able. When  possible  it  secures  the  election  of  persons 
holding  union  cards,  .\iding  rather  than  attempting 
to  rival  the  organizations  existing  in  separate  trades, 
the  Federation  has  now  gained  the  leadership  of  the 
American  labor  movement. 

§  208.  A  form  of  organization  known  as  industrial 
unionism  has  recently  come  into  prominence.  With 
respect  to  character  of  membership  it  lies  be-  industrial 
tween  the  trade  union  and  such  an  organiza-  "'"o^^m. 
tion  as  the  Knights  of  Labor.  It  attempts  to  follow  the 
lines  of  cleavage  into  which  entrepreneurs  have  already 
divided  the  economic  activities  of  the  community.  The 
industrial  union  is  advocated  as  being  much  more 
effective  than  the  trade  union  in  a  contest  with  em- 
ployers. With  the  trade  union,  when  a  strike  is  called, 
men  in  other  trade  unions  will  continue  at  work;  with 
the  industrial  union  the  entire  force  will  walk  out  to- 
gether. 

The  Western  Federation  of  Miners  and  the  United 
Brewer}'  Workers  are   organized   as   industrial   unions, 


3l8  THE  LABOR  PROBLEM 

and  as  such  have  been  admitted  to  the  American 
Federation  of  Labor.  The  leading  exponent  of  this 
^jjg  form  of  unionism,  however,  is  the  Industrial 

Work*"^  Workers  of  the  World,  a  revolutionary  organ- 
of  the  ization  with  socialistic  principles.     Its  aims 

World. 

and  methods,  therefore,  would  be  more  appro- 
priately studied  as  a  phase  of  sociahsm.  It  is  sufficient 
to  remark  here  that  while  trade  unionism,  as  represented 
by  the  American  Federation  of  Labor,  looks  upon  the 
present  social  order,  with  its  division  into  landlords, 
capitalists,  entrepreneurs,  and  laborers  as  permanent, 
and  simply  proposes  the  trade  union  as  a  means  to  ob- 
tain by  collective  bargaining  better  terms  for  laborers, 
the  Industrial  Workers  of  the  World  look  forward  to  a 
new  social  order  of  which  industrial  unionism  shall  be 
the  framework.  All  men  will  be  laborers,  employing 
themselves  through  the  collective  action  of  their  in- 
dustrial unions.  For  them,  therefore,  the  industrial 
union  is  to  be  developed,  first,  as  a  mihtant  organiza- 
tion for  collective  bargaining  and  fighting  capitalism 
during  the  transition  period,  and,  second,  as  the  perma- 
nent mold  in  which  the  new  social  order  is  to  be  cast. 
At  present,  in  spite  of  the  widespread  attention  it  has 
attracted  because  of  its  aggressive  methods  of  fighting, 
its  numbers  are  small. 

§  209.  Returning  to  the  more  conservative  type  of 
labor  organizations,  we  find  that  their  objects  are  various, 
Objects  of      ^^^^  ^^^^^  ^^^^^  purpose  is  to  better  the  economic 

labor  organ-  condition  of  the  workmen.     While  manv  of 
izations. 

them  endeavor  to  improve  the  education  and 

the  morals  of  their  members,  or  to  promote  social  inter- 


LABOR   ORGANIZATIONS  319 

course,  and  while  valuable  results  are  sometimes  ac- 
complished in  these  directions,  the  labor  unions  are 
interested  chiefly  in  bettering  the  conditions  of  employ- 
ment, either  through  collective  bargaining  directly  with 
employers,  or  indirectly  by  political  and  legislative 
action,  and  by  providing  insurance  against  accident, 
sickness,  unemployment,  and  death.  Insurance  against 
unemployment  is  especially  valuable  from  a  trade  union 
standpoint.  Besides  offering  advantages  similar  to  all 
forms  of  insurance  it  tends  to  prevent  in  "bad  times" 
the  breaking  down  of  the  standard  wage.  Without 
such  protection,  unemployed  members  would  be  tempted 
to  desert  the  union  and  accept  positions  at  less  than 
the  union  wage.  The  other  insurance  schemes  are 
often  useful  to  the  organizations  themselves  insurance 
in  attracting  new  members  and  providing  a  schemes, 
method  of  disciplining  the  disobedient  or  unruly,  who, 
through  expulsion,  lose  their  interest  in  any  funds  that 
have  been  accumulated.  But  considered  purely  from 
the  standpoint  of  the  security  which  they  afford,  the 
arrangements  of  the  unions  are  not  so  advantageous  for 
the  insured.  Usually  insurance  funds  are  not  separated 
from  the  other  resources  of  the  unions,  and  may  be  ex- 
pended in  aid  of  strikes,  so  that  those  who  pay  money 
for  one  purpose  may  see  it  disbursed  for  another.  Then, 
too,  the  rate  of  assessment  has  not  always  been  high 
enough  to  place  the  schemes  upon  a  sound  financial  basis. 
In  these  respects  there  is  much  room  for  improvement, 
and  it  is  to  be  hoped  that  more  of  the  unions  will  follow 
the  example  of  the  Locomotive  Engineers  in  effecting 
an  absolute  separation  of  strike  and  insurance  funds. 


320  THE  LABOR   PROBLEM 

§  2  lo.  The  first  and  fundamental  principle  of  unionism 
is  collective  bargaining.  As  pointed  out  in  a  previous 
Collective  section  the  individual  laborer  is  frequently  at  a 
bargaining,  disadvantage  under  free  competition.  This 
disadvantage  the  labor  union  proposes  to  overcome  by- 
forbidding  any  member  to  make  an  individual  bargain 
with  his  employer  and  by  constraining  the  employer 
(if  he  employs  union  men  at  all)  to  make  his  bargain  as 
to  wages,  hours,  etc.,  with  the  whole  union  through  its 
chosen  representative.  By  this  means,  when  wisely 
conducted,  a  union  may  be  a  highly  desirable  means  of 
securing  the  healthy  operation  of  competition  in  the 
market  for  labor.  By  making  the  strength  of  the  parties 
to  the  contract  substantially  equal,  it  can  oblige  em- 
ployers to  pay  all  that  the  market  will  enable  them  to 
give ;  while,  by  assisting  its  members  to  migrate  to 
places  where  the  demand  is  active,  it  can  distribute  the 
supply  of  labor  in  the  manner  that  is  most  advantageous 
to  the  community.  By  accumulating  a  reserve  fund 
upon  which  its  members  can  subsist  while  temporarily 
out  of  employment,  it  enables  them  to  tide  over  a  diffi- 
cult period  until  they  find  such  conditions  as  they  deem 
advantageous.  The  satisfactory  working  of  the  laws 
of  supply  and  demand  requires  that  laborers,  as  well  as 
employers,  shall  be  intelligent,  alert,  and  able  to  seek 
their  own  advantage  —  a  condition  which  the  union 
endeavors  to  maintain. 

§  211.  A  few  words  should  be  said  concerning  two 
things  which  are  now  cardinal  points  of  trade-union  policy 
—  the  standard  wage  and  the  union,  or  closed,  shop.  In 
adjusting  wages  the  unions  usually  demand  a  standard 


LABOR    ORGANIZATIONS  32 1 

rate  for  all  their  members,  except  perhaps  a  few  older  or 
less  competent  workmen  who  may  be  permitted  to  accept 
less.  Theoretically  this  is  a  minimum  wage,  jhe  stand- 
and  there  is  nothing  to  prevent  an  employer  "^  ^^^® 
from  paying  more  ;  but  in  practice  it  is  often  a  maximum 
rate  beyond  which  superior  workmen  do  not  advance. 
This  is  due  sometimes  to  the  fact  that  the  minimum  is 
placed  so  high  that  many  employees  do  not  earn  all  they 
receive,  so  that  it  is  impossible  to  pay  more  to  the  better 
workmen,  who  must  carry  the  poorer  upon  their  backs. 
Or,  in  other  cases,  it  arises  from  a  disinclination  upon 
the  part  of  unionists  to  allow  any  of  their  members  to 
do  more  than  a  certain  amount  of  work,  —  a  matter  to 
which  we  shall  return  in  a  later  paragraph. 

It  is  even  urged  that  the  standard  rate  should  be  main- 
tained at  all  times,  no  matter  what  the  condition  of  the 
labor  market  may  be,  and  that  when  the  (,j^^j^.jgj^ 
demand  for  products  declines  and  prices  fall, 
an  employer  should  be  obliged  to  go  out  of  business  rather 
than  be  allowed  to  cut  wages.  This  method  disposes  of 
the  employer,  but  it  does  not  provide  for  the  payment 
of  the  standard  wages  after  he  goes  out  of  business ;  in 
fact  it  would  merely  increase,  in  times  of  depression,  the 
army  of  the  unemployed  by  whose  competition  ultimately 
the  standard  rate  would  be  Ijrokcn  down  even  in  those 
establishments  that  might  maintain  their  solvency. 
With  the  progress  of  industry  it  is  possible  and  desirable 
that  the  rate  of  wages  should  steadily  advance,  but  its 
upward  movement  cannot  be  continuous,  irrespective 
of  the  conditions  of  the  market.  So  long  as  conditions 
of  business  fluctuate,  the  rate  of  wages  cannot  be  un- 


322  THE  LABOR   PROBLEM 

affected  by  this  fact.  Unions  can  demand  a  higher  rate 
in  every  period  of  rising  prices,  but  with  a  falling  market 
it  is  idle  for  them  to  refuse  to  make  concessions. 

§  212.  As  labor  organizations  increase  in  strength, 
they  often  refuse  to  permit  their  members  to  work 
The  closed  i^^  establishments  employing  non-union  men, 
shop.  Qj.  threaten  to  strike  unless  non-union  men  are 

discharged.  There  are  several  reasons  for  this  policy. 
Employers  often  show  preference  for  non-union  men 
with  a  view  to  weakening  or  breaking  up  the  union. 
Where  the  open  shop  prevails  there  is  a  steady  induce- 
ment to  the  best  men  to  make  individual  contracts  with 
their  employers,  thus  weakening  the  union.  With  the 
closed  shop,  however,  there  is  the  strongest  kind  of 
inducement  to  all  men  who  desire  to  work  at  the  trade 
to  join  the  union  and  thus  augment  its  numbers  and 
increase  its  strength.  It  is  claimed  that  the  unions  by 
much  effort  and  sacrifice  have  obtained  better  conditions 
for  the  laboring  class  in  general,  and  that  it  is  unfair  for 
non-union  men  to  obtain  these  better  conditions  for 
which  they  have  made  no  such  effort  and  sacrifice. 
When  the  attempt  is  made  to  enforce  the  closed  shop 
in  order  to  combat  the  efforts  of  employers  to  break  up 
the  unions  by  constantly  displacing  their  members  in 
order  to  make  room  for  outsiders,  it  would  seem  to  be  a 
justifiable  weapon  of  defense.  But  in  cases  where  no 
discrimination  is  practiced  against  unionists,  the  demand 
for  a  closed  shop  cannot  be  justified.  It  means  nothing 
more  or  less  than  that  a  private  association  attempts  to 
deny  the  right  to  work  to  all  who  will  not  join  its  ranks, 
and  it  can  be  enforced  only  by  arousing  the  worst  passions 


LABOR  ORGAmZATIOI^S  323 

of  human  nature  against  the  man  who  refuses  to  join  a 
union. 

The  chief  danger  of  the  closed  shop,  from  an  economic 
point  of  view,  lies  in  the  monopoUstic  powers  which 
it  may  give  to  the  union.     By  imposing  hiigh 
initiation  fees,  requiring  long  apprenticeships,  listicinits 

tendencies. 

and  giving  unfair  advantages  to  the  children 
of  its  members,  a  union  could  easily  become  the  master 
of  the  situation,  and  abuse  its  powers  for  selfish  ends. 
Labor  organizations  are  subject  to  all  the  infirmities 
that  combinations  of  capitalists  display,  and  there  is 
no  reason  for  thinking  that  a  monopoly  of  labor  is  at  all 
preferable  to  a  monopoly  of  capital.  Capitalist  and 
laborer  alike  need  to  be  kept  upon  their  good  behavior 
by  the  pressure  of  competition,  and  the  public  must 
suffer  when  either  of  them  acquires  a  monopoly. 

§  213.  It  is  often  charged  that  trade  unions  restrict  the 
amount  of  work  which  their  members  do.  They  are  also 
believed  to  exercise  an  unfavorable  influence  Restriction 
upon  industrial  efficiency.  In  considering  the  °^  output, 
matter  it  should  be  remembered  that  there  are  certain 
reasonable  limits  to  the  amount  of  labor  that  any  one 
should  perform.  In  a  trade  that  demands  severe  physical 
exertion  or  exposure  to  more  or  less  unhealthful  condi- 
tions of  employment,  there  is  a  pace  that  makes  a  work- 
man old  at  forty,  and  one  that  will  enable  him  to  do  a 
man's  work  still  at  the  age  of  sixty.  If  a  union  does  no 
more  than  oppose  overdriving  and  endeavors  to  insure 
to  its  members  forty  instead  of  twenty  years  of  efficiency, 
its  course  is  morally  and  economically  justifiable.  But, 
unfortunately,  this  is  not  always  the  whole  of  the  story. 


324  THE  LABOR  PROBLEM 

In  a  few  cases  the  regulations  of  unions  have  forced  an 
unreasonable  restriction  of  the  output ;  and,  in  a  some- 
what larger  number,  a  tacit  agreement  among  the  mem- 
bers has  had  the  same  result.    The  precise  extent  of  this 
evil  is  hard  to  determine,  and  sweeping  statements  should 
be  avoided.     Here  and  there  in  the  building  trades,  daw- 
dling has  sometimes  been  reduced  to  a  fine  art,  and  one 
can  occasionally  observe  elsewhere  that  union  workmen  are 
acquiring  the  most  leisurely  habits  of  work.     It  should  be 
remembered,  however,  that  laziness  is  older  than  trade 
unionism,  and  that  the  unions  can  be  held  accountable 
only  for  cases  in  which  their  influence  has  tended  to  increase 
this  evil.     Such  instances  undoubtedly  exist,  but  more 
evidence  than  has  so  far  been  adduced  would  be  needed 
to  justify  anymore  positive  statement  than  we  have  made. 
§  214.   Beginning  with  comparatively  feeble  unions 
of  individually  helpless  workmen,  labor  organizations 
iiKreasin       ^^^^  grown  in  all  civilized  countries  to  forces 
organiza-       of  tremendous  power,  wealth,  and  coherence. 
Their  mcreasing  power  has  alarmed  the  em- 
ploying class  which  in  turn  has  felt  itself  compelled 
to  organize.     Large  associations  of  employers  have  thus 
arisen  to  resist  what  they  consider  the  impossible  or  ex- 
tortionate demands  of   labor.     Among  the  employers' 
Employers'     Organizations  may  be  mentioned  the  National 
associations.  Association  of  Manufacturers,  the  National 
Council    for   Industrial    Defense,   the   American    Anti- 
Boycott  Association^  and  numerous  local  associations  and 
leagues  scattered  throughout  the  country.    The  National 
Association  of  Manufacturers  has  a  membership  of  some 
4000  manufacturing  concerns  representing  a  combined 


LABOR   ORGANIZATIONS  325 

capital  of  about  $10,000,000,000  and  emplojing  about 
5,000,000  laborers.  Indeed,  this  process  of  organiza- 
tion has    continued   until  now  over  a  large  .  ,    ^ .  , 

°      Industnal 

portion  of  the  industrial  field  the  situation  warfare. 

\  Direct  and 

is  that  of  two  mighty  powers  struggling  for  political 

r    •     1  methods. 

control  rather  than  that  of  independent  em- 
ployers and  laborers  individually  competing  among  them- 
selves as  to  the  terms  of  the  labor  contract.  It  is  a 
situation  of  industrial  warfare.  In  this  struggle  for 
supremacy  the  chief  weapons  used  by  organized  labor 
are  the  strike,  the  picket,  the  boycott,  and  the  union 
label.  The  chief  weapons  used  by  their  opponents  are 
the  lockout,  the  blacklist,  the  spy  system,  and  the  main- 
tenance in  various  ways  of  a  force  of  strike  breakers. 
Both  parties  maintain  large  reserve  funds  for  the  pur- 
pose of  carrying  oh  the  contest,  and  both  are  active 
in  the  political  and  legislative  fields  to  attain  their 
ends  indirectly  by  securing  laws  favorable  to  their  re- 
spective interests.  The  American  Federation  of  Labor 
maintains  a  legislative  committee  to  draft  and  secure 
the  passage  of  labor  bills  in  congress,  and  to  keep 
organized  labor  throughout  the  country  posted  as  to 
the  status  of  labor  bills.  The  Federation  also  enters 
actively  into  political  campaigns  to  secure  the  election 
of  candidates  favorable  to  labor,  irrespective  of  their 
party  affiliations.  The  National  Council  for  Industrial 
Defense  and  the  National  Association  of  Manufacturers 
render  parallel  services  for  the  employing  class  in  the 
legislative  and  political  fields,  while  the  American  Anti- 
Boycott  Association  attacks  the  boycott  and  the  sympa- 
thetic strike  through  the  courts. 


326  THE  LABOR  PROBLEM 

This  industrial  warfare,  like  all  warfare,  is  economically 
injurious.     Laborers   lose   in  wages   and   employers   in 

profits  through  strikes  and  boycotts,  and  a 
cosTof""'^  vast  amount  of  human  energy  is  wasted  in 
warfare^^       mutually  destructive  antagonism  which  might 

better  be  applied  to  cooperative  efforts  of 
production.  Nor  is  the  loss  confined  to  employers  and 
laborers.  The  general  public  is  affected  through  the 
loss  of  its  customary  supplies  and  services,  and  some- 
times, as  in  the  case  of  coal  mines  or  the  railroad  service, 
the  loss  sustained  by  the  public  greatly  outweighs  that 
of  the  parties  directly  concerned.  From  data  gathered 
by  the  Federal  Bureau  of  Labor  it  appears  that  during 
the  twenty-five  year  period  from  1881  to  1905  there  were 
in  the  United  States  38,303  strikes  and  lockouts.  These 
disturbances  involved  199,954  establishments  and 
7,444,279  employees.  About  2,000,000  others  were 
thrown  out  of  work  as  a  direct  result.  The  average 
time  lost  in  each  strike  was  30.8  days.  Assuming  an 
average  of  only  one  dollar  a  day  for  wages,  this  would 
mean  a  loss  to  laborers  of  $380,000,000.  The  money 
loss  to  employers  and  to  the  general  public  can  only  be 
estimated.  The  loss  to  laborers  is,  of  course,  partially 
or  wholly  offset  in  the  cases  where  strikes  are  success- 
ful. It  is  estimated  that  of  the  total  number  of  strikes 
during  the  above-mentioned  period  48  per  cent  were  won, 
37  per  cent  were  lost,  and  15  per  cent  were  partially 
won.  These  figures  seem  very  large  when  stated  as 
aggregates,  but  when  stated  in  comparative  terms  our 
estimate  of  the  seriousness  of  the  loss  undergoes  con^ 
siderable    shrinkage.     The    money    expense    of    strikes 


LABOR   ORGANIZATIONS  327 

has  been  estimated  at  about  three  cents  a  day  per  in- 
habitant of  the  United  States  and  at  less  than  one  dam- 
per year  per  adult  worker.  A  study  of  the  statistics 
of  unemplo}Tnent  in  Massachusetts  shows  that  9.7  per 
cent  of  the  trade  union  membership  is  chronically  un- 
employed but  only  0.61  per  cent  is  thus  unemployed 
because  of  strikes  and  lockouts. 

The  more  serious  aspect  of  industrial   warfare  is  to 
be  found  in  its  socially  and  politically  disruptive  effects. 
Class  is  arrayed  against  class  and  between  them 
is  a  growing  and  deepening  spirit  of  mutual  indus^triai 
suspicion  and  hate.     Such  a  state  of  affairs  Resp"nsi- 

cannot  be  XN-ithout  peril  to  the  nation.     The  ^^'^^  ^^^ 
i  cause. 

responsibility  for  such  conditions  is  some- 
times laid  at  the  door  of  labor  organizations,  but  not 
more  than  half  of  it  belongs  there.  The  workmen  have 
often  made  unreasonable  demands ;  they  have  been 
arrogant  and  selfish  in  too  many  cases,  and  have  some- 
times sufifered  from  outbreaks  of  homicidal  mania.  But, 
on  the  other  hand,  the  reasonable  demands  of  labor 
have  often  been  met  with  refusals  to  treat  with  the 
representatives  of  any  organization ;  violence  has  been 
met  with  violence  and  arrogance  with  arrogance,  and 
both  parties  have  shown  a  callous  indifference  to  the 
inconvenience  and  often  suffering  which  their  warfare 
entails  upon  the  public.  It  is,  perhaps,  more  accurate 
to  say  that  the  situation  is  one  to  which  individual 
responsibility  and  blame  cannot  be  attached.  It  has 
rather  developed  as  an  inevitable  consequence  of  the 
consolidation  of  capital  and  the  massing  of  men  incident 
to  the  factory  system  and   large-scale  production,  and 


328  THE  LABOR   PROBLEM 

of  the  human  certainty  that  irresponsible  power  will 
always  be  abused  when  attained. 

But  the  questions  of  blame  and  cause  are  only  im- 
portant in  so  far  as  they  throw  light  upon  the  remedy, 
_  ,.  and  the  remedy,  unfortunately,  is  not  easy 
for  Indus-       to  See.     Doubtless  the  grosser  manifestations 

trial  war- 

fare.  The  of  the  Conflict  may  be  repressed  by  the  law. 
What,  then,  is  the  legal  status  of  the  various 
forms  which  the  conflict  has  taken?  Intimidation  and 
violence  in  whatever  connection  they  may  arise  are 
punishable  crimes,  and  against  them,  whether  used 
in  conjunction  with  the  strike,  picket,  boycott,  or  lock- 
out, the  law  should  be  rigorously  and  impartially  en- 
forced. As  to  the  specific  forms  themselves,  the  union 
label  is  not  only  everywhere  legal  but  is  generally 
protected  by  the  law.  The  strike  also  is  generally  legal. 
Legal  status  though  the  courts  have  sometimes  taken  into 
boycott^'  account  the  motive.  The  sympathetic  strike 
^^"^  and  the  strike  where  the  motive  was  believed 

to  be  malice  have  on  some  occasions  been  enjoined  as 
illegal.  The  status  of  picketing  is  somewhat  difficult 
to  determine.  In  itself,  when  unaccompanied  with 
intimidation  or  violence,  it  is  probably  legal.  But 
what  constitutes  intimidation  is  sometimes  hard  to 
determine.  The  general  trend  of  court  opinion  has  been 
against  the  legality  of  the  boycott,  though  there  are 
conflicting  decisions.  Here,  the  question  of  motive 
has  played  a  much  more  important  role  than  in  the  case 
of  strikes.  The  primary  boycott,  that  is,  the  mere 
agreement  to  purchase  no  goods  from  the  employer, 
has  often  been  held  to  be  legal,  but  the  secondary  and 


LABOR   ORGANIZATIONS  329 

compound  forms  of  the  boycott  are  generally  con- 
demned. Congress,  in  so  far  as  it  has  authority  in 
connection  with  its  power  over  interstate  commerce, 
by  an  act  passed  in  1914,  has  declared  legal  the  strike, 
the  picket,  and  the  boycott,  when  conducted  by  "lawful 
means",  that  is,  presumably,  when  unaccompanied  by 
intimidation  or  \dolence.  It  is  an  open  question  whether 
this  permissive  legislation  \\all  apply  to  the  secondary 
or  more  complex  forms  of  the  boycott,  for  the  act  still 
awaits  judicial  interpretation.  Of  the  methods  made 
use  of  by  employers  the  blacklist  is  illegal  in  most  states, 
but  laws  against  it  are  difficult  to  enforce.  The  lockout, 
however,  is  legal. 

§  215.  Coming  now  to  the  remedies  proposed  for 
industrial  warfare,  doubtless  free  competition  is  still 
a  force  to  be  reckoned  with.     The  members  of  ^ 

Free  com- 

labor  organizations  are  still  a  minority  of  the  petition  as 

....       a  remedy. 

laboring  population.  Individualism  is  still 
strong.  Many  of  the  laboring  class  prefer  to  take  their 
chance  of  individual  promotion  by  their  employers  rather 
than  submit  to  control  by  a  labor  union.  There  is  still  a 
large  force  of  non-union  men  to  draw  from  when  unions 
become  too  exacting.  A  union  which  is  too  exclusive 
and  successful  invites  the  organization  of  a  rival  union. 
A  labor  monopoly  is  always  subject  to  potential  com- 
petition, as  is  a  capitalistic  monopoly.  Finally,  a  too 
exclusive  and  insolent  union  stimulates  the  invention 
of  labor-saving  machinery  which  will  render  its  services 
unnecessary.  Competition,  therefore,  is  still  a  force  to 
protect  employers  and  the  public  against  the  undue 
exactions  of  labor  unions ;  but,  as  we  have  seen,  it  is 


330  THE  LABOR  PROBLEM 

of  little  avail  to  protect  laborers  against  the  undue 
exactions  of  employers  when  the  latter  gain  the  upper 
hand.  It  is  probable,  therefore,  that  the  tendency  of 
laborers  to  organize  will  increase  in  the  future,  rather 
than  diminish ;  and,  as  laborers  become  more  and  more 
a  political  power  because  of  their  voting  strength,  the 
law  will  be  found  to  adapt  itself  more  and  more  to  their 
demands.  The  competitive  ideal  held  forth  by  the  early 
English  economists  as  the  universal  remedy  for  all 
economic  troubles  seems  less  and  less  capable  of  realiz- 
ing its  promises,  so  far  as  the  labor  problem  is  con- 
cerned. The  solution  of  this  problem  lies  rather  in 
the  opposite  direction,  that  is,  in  the  direction  of  a  more 
perfect,  comprehensive,  and  deliberately  planned  or- 
ganization of  the  industrial  forces  in  both  production 
and  distribution.  In  this  connection  may  be  discussed 
methods  of  concihation,  arbitration,  profit-sharing,  wel- 
fare work,  scientific  management,  and  cooperation. 

Of  these  expedients  the  simplest  is  conciliation. 
Joint  boards  of  conciliation  or  shop  committees  are 
Concilia-  appointed  in  individual  establishments,  before 
coundfs"^  which  complaints  can  be  brought  for  calm  and 
joint  fair  consideration  before  they  lead  to  serious 

agreements.  •' 

disputes ;  or  employers'  associations  and  labor 
organizations  covering  entire  trades  have  arranged 
prices  and  conditions  of  employment  for  definite  periods 
of  time,  and  have  agreed  to  submit  to  boards  of  arbi- 
tration all  disputes  that  may  arise  concerning  the  in- 
terpretation of  the  contracts.  When  such  methods 
have  been  tried  in  good  faith,  it  has  been  found  that 
many  causes  for  disputes  can  be  removed  by  a  friendly 


LABOR   ORGANIZATIONS  33  I 

conference ;  both  employers  and  laborers  have  taken 
care  to  avoid  mistakes,  and  have  sometimes  shown  in- 
creased respect  and  consideration  for  one  another.  In 
some  cases  strikes  and  lockouts  have  been  avoided  for 
considerable  periods  of  time ;  and  it  has  been  demon- 
strated that  the  conflicting  claims  of  labor  and  capital 
can  be  adjusted  upon  a  basis  of  reason  and  justice  without' 
appeals  to  the  wager  of  battle,  and,  withal,  in  a  spirit  of 
mutual  good  will. 

When  disagreements  between  employers  and  laborers 
have  led  to  an  open  rupture,  both  parties  have  sometimes 
consented  to  submit  their  cases  to  arbitration  voluntary 
by  some  fairly  constituted  tribunal.  A  few  arbitration, 
of  our  states  have  established  boards  of  conciliation  and 
arbitration,  the  services  of  which  are  placed  at  the  dis- 
posal of  laborers  and  capitalists.  In  Massachusetts, 
New  York,  and  a  few  other  states  something  has  been 
accomplished  in  this  manner,  especially  in  the  settle- 
ment of  controversies  that  have  not.  yet  led  to  an  open 
rupture.  The  federal  government  likewise  has  estab- 
lished a  board  similar  to  the  state  boards  for  the  settle- 
ment of  disputes  in  the  railroad  service.  Either  party 
may  apply  to  it,  and  the  board  will  at  once  Federal 
notify  the  other  party  and  offer  its  services  legislation. 
for  effecting  an  adjustment ;  while,  if  this  fails,  it  is 
authorized  to  ai)j)oint  arbitrators.  But  both  {parties 
must  consent,  and  agree  to  abide  by  the  decision.  The 
board  was  successful  in  cft'ccting  several  adjustments 
of  cli.sj)ules.  but  in  1916  the  railway  brotherhoods  in 
making  their  demand  for  the  eight  hour  day  refused 
-to  submit  their  case  to  arbitration,  the  railroads  refused 


332  THE  LABOR   PROBLEM 

to  grant  without  arbitration  the  eight  hour  day,  and  a 
strike  of  nation-wide  dimensions  was  averted  only  by 
special  congressional  action.  Experience  has  shown 
that  the  party  which  feels  itself  to  be  in  the  stronger 
strategic  position,  whether  employer  or  employed,  is 
likely  to  refuse  to  submit  to  arbitration  and  prefers  a 
trial  of  strength.  On  the  whole  the  principles  of  volun- 
tary conciliation  and  arbitration  are  found  to  be  of 
rather  limited  application. 

Under  these  conditions  the  question  arises  whether  the 
state  may  not  properly  intervene  and  compel  workmen 
Compulsory  ^"^^  their  employers  to  settle  their  disputes  by 
arbitration,  i^g^l  proccss.  This  principle  of  so-called  com- 
pulsory arbitration  has  now  been  in  operation  in  New 
Zealand  since  1894  and  has  more  recently  been  applied 
in  even  more  drastic  form  in  AustraKa.  In  New  Zealand 
the  law  provides  for  boards  of  conciliation  and  a  single 
court  of  arbitration  for  the  whole  province.  The  court 
consists  of  three  judges  appointed  by  the  governor,  — 
one  from  nominees  of  employers,  one  from  nominees 
of  trade  unions,  and  the  third  from  the  supreme  court. 
Duly  registered  trade  unions  and  all  employers  (whether 
organized  or  not)  may  avail  themselves  of  the  privileges 
of  the  act.  In  case  of  an  industrial  dispute  either  the 
employer  or  the  union  may  appeal  to  the  court,  and 
when  such  appeal  is  made  a  strike  or  lockout  becomes 
a  criminal  offense  while  the  case  is  pending.  The  find- 
ings of  the  court  apply  to  the  whole  trade,  not  merely  to 
the  persons  who  brought  the  suit.  It  will  appear  from 
the  above  that  the  New  Zealand  law  does  not  entirely 
outlaw   strikes.    Unregistered   unions   or    unorganized 


LABOR   ORGANIZATIONS  333 

laborers  may  strike.  Even  in  the  case  of  registered 
unions,  if  neither  union  nor  employer  asks  the  court  to 
intervene,  a  strike  is  not  illegal.  In  Australia,  however, 
the  court  may  take  the  initiative,  and  when  it  does  so 
strikes  and  lockouts  are  forbidden. 

Compulsory  arbitration  has  now  been  on  trial  long 
enough  to  develop  its  points  of  strength  and  weakness. 
It  has  not  brought  harmony  between  employers 
and  employed,  it  has  not  even  entirely  pre-  compulsory 

....  arbitration 

vented  stnkes.  It  is  easy  to  enforce  an  award 
against  employers  who  have  property  that  may  be  at- 
tached :  difficult  as  against  propertyless  workmen.  The 
law,  therefore,  works  smoothly  in  "good  times"  when  the 
aw^ards  are  uniformly  in  favor  of  the  workers ;  not  so  well 
in  times  of  depression.  Yet  in  spite  of  much  criticism  of 
details,  the  prevailing  opinion  among  both  employers  and 
laborers  is  that  the  law  is  vastly  superior  to  the  chaotic 
condition  which  prevailed  before  its  passage.  There  is 
a  disposition,  therefore,  to  amend  rather  than  repeal. 

In  regard  to  the  possibility  of  applying  such  a  prin- 
ciple in  the  United  States  it  must  be  said  that  its  suc- 
cessful working  depends  entirely  upon  a  strong  ^^  ^    ^^^ 

public   sentiment.     Such   a   sentiment   exists  *?  *h^, 
.  United 

in  Australia  and  New  Zealand ;   it  does  not  states 
exist  in  the  United  States.     At  present  both  service 

,  ,  -111  1  industries. 

employers  and  organized  labor  are  almost 
unanimous  in  their  opposition.  The  conditions  in  the 
United  States  are  very  different  from  those  in  New 
Zealand :  our  poj)ulali()n  is  less  homogeneous,  our 
problems  are  vaster.  There  seems  no  immediate  pros- 
pect of  its  general  adoption  as  applied  to  all  industries. 


334  THE  LABOR  PROBLEM 

Nevertheless,  there  is  a  growing  sentiment  that  in  the 
case  of  public-service  industries  some  such  method  is 
fast  becoming  a  necessity.  In  such  cases  the  interests 
of  the  pubHc  vastly  exceed  those  of  either  the  corpora- 
tions or  their  employees.  We  have  placed  pubUc- 
service  corporations  under  regulation,  and  may  shortly 
be  compelled  to  extend  such  regulation  to  the  em- 
ployees. Under  our  complex  system  of  industry  the 
life  of  the  people  is  dependent  upon  the  continuous 
performance  of  these  services.  When  employers  or 
laborers  will  not  listen  to  reason,  they  must  bend  to 
force,  and  that  force  should  be  the  will  of  the  people 
through  their  properly  constituted  agencies  of  govern- 
ment. In  this  connection  the  Canadian  system  of 
compulsory  investigation,  with  prohibition  under  heavy 
penalty  of  a  strike  or  lockout  pending  the  investiga- 
tion, is  worthy  of  careful  study. 

Disputes  between  labor  and  capital  will  continue  so 
long  as  industry  is  organized  on  its  present  basis  ;  and  the 
Summary       ^^^  ^^v^g  that  can  be  expected  is  that  need- 
less controversy  will  be  avoided,  and  that  each 
contestant  will  respect  the  rights  of  the  other  and  those  of 
the  public.     Through  shop  councils  and  joint  agreements 
much  can  be  accomplished,  and  relentless  punishment 
of  unlawful  tactics  will  remove  a  great  part  of  the  incon- 
venience which  non-combatants  now  suffer.     As  labor 
organizations  grow   older   and   acquire  property,    they 
become  more  conservative;     and  employers  are  slowly 
learning  that  the  trade  union  has  come  to  stay,  and  that 
laborers  are  entitled  to  have  a  voice  in  determining  the 
conditions  under  which  they  work.     It  is  useless  to  hope 


RELATIOA-    OF  LABORERS   TO   THE  PRODUCT     335 

for  an  industrial  millennium ;  but  occasions  for  con- 
troversy will  be  removed  in  proportion  as  labor  and 
capital  acquire  respect  for  each  other's  strength,  and 
each  considers  fairly  the  just  claims  of  the  other. 

IV.  The  Relation  of  Laborers  to  the  Product  of  their  Labor 

§  216.  Irrespective  of  any  influence  that  trade  unions 
exert,  experience  shows  that  laborers  receiving  time 
wages  are  likely  to  have  less  incentive  than  Tijne  ^nd 
they  need  to  turn  out  a  large  product.  Piece  p'®*^®  wages, 
wages,  therefore,  have  been  introduced  in  many  in- 
dustries, in  order  to  give  the  workman  a  greater  stimulus 
to  diligent  effort.  Not  infrequently  employers  have 
introduced  piece  wages  and  secured  a  larger  product 
from  each  laborer,  and  then  have  reduced  the  rate  paid 
per  piece,  so  that  an  employee  must  work  much  harder 
than  before  in  order  to  make  as  much  as  his  former 
time  wages.  Naturally  enough,  such  experiences  have 
led  many  laborers  to  look  with  suspicion  upon  proposals 
to  adopt  piece  wages,  and  to  refrain  from  increasing 
their  output  even  when  the  system  has  been  introduced. 
Yet  in  many  industries  payment  by  the  piece  prevails, 
and  by  fair  treatment  the  opposition  of  the  wage  earners 
has  been  overcome. 

§  217.  Another  method  of  adjusting  the  remuneration 
of  the  laborer  is  what  is  known  as  a  progressive  wage. 
Employees  have  been  guaranteed  a  minimum  Progressive 
time  wage,  and  then  offered  a  j)r(niium  for  ''^^es. 
attaining  a  certain  degree  of  efficiency ;  or  piece  rates 
have  been  adjusted  uj)on  a  j:)rogressive  scale,  the  rate 
per  piece  rising  slightly  as  the  output  increases.     In 


336  THE  LABOR   PROBLEM 

some  cases  progressive  wages  have  increased  the  product 
by  as  much  as  fifty,  eighty,  or  even  one  hundred  per 
cent.  They  may  be  a  desirable  method  of  remuneration 
in  some  occupations ;  but,  when  they  combine  a  minimum 
time  wage  with  a  premium  for  efficiency,  they  are  less 
advantageous  for  the  laborer  than  a  simple  piece  wage.^ 

§  218.  Profit  sharing  is  a  plan  which  is  designed  to 
give  the  laborer  an  inducement  to  work  more  efiiciently, 
Profit  ^iid    to  secure  greater  harmony  of   interest 

sharing.  between  employer  and  employee.  It  offers 
the  laborers,  besides  their  usual  wages,  a  share  in  any 
profits  realized  from  the  business  over  and  above  a 
certain  minimum  amount  considered  to  be  the  necessary 
remuneration  of  the  proprietor,  the  portion  of  each 
employee  being  determined  upon  some  equitable  basis. 
In  some  cases  this  arrangement  has  given  laborers  an 
inducement  to  increase  the  product,  improve  its  quality, 
or  economize  in  the  use  of  materials,  so  that  by  the 
efforts  of  the  participants  themselves  profits  have  been 
increased  and  the  remuneration  of  the  workers  enlarged. 
But  much  more  often  it  has  turned  out  that  the  profits 
exceed  but  little,  if  at  all,  the  minimum  sum  reserved 
for  the  proprietor ;  and,  therefore,  the  laborers  have 
had  only  the  slightest  interest  in  the  working  of  the 
schemes,  not  hesitating  to  strike  if  there  was  any  pros- 
pect of  immediate  advantage  from  such  a  source. 

As  a  scheme  of  distribution,  profit  sharing  is  open  to 
serious  objections.  The  profits  of  a  business  can  be 
increased  by  greater  diligence  on  the  part  of  laborers, 

^  The  premium  paid  for  exceeding  a  certain  product  is  usually  less 
than  a  proportionate  addition  to  the  time  wage. 


RELATION  OF  LABORERS   TO    THE  PRODUCT    337 

but  they  depend  so  largely  upon  the  skill  exercised  in 
buying  materials,  organizing  production,  and  disposing 
of  the  product,  that  their  amount  does  not  and  ^  . .  . 

,  ,  Cnticism. 

cannot  vary  proportionately  to  the  increased 
zeal  and  eflSciency  of  the  employees.  Laborers  may 
increase  the  product  ten  per  cent,  or  reduce  its  cost  in 
corresponding  proportion,  but  bad  business  manage- 
ment may  result  in  an  actual  loss  upon  the  year's  transac- 
tions. In  this  case  the  extra  exertion  of  the  employees 
would  reduce  the  extent  of  the  losses,  but  would  bring 
no  extra  remuneration.  On  the  other  hand,  if  the 
profits  distributed  are  not  created  by  extra  exertion 
upon  the  part  of  the  workmen,  but  arise  from  greater 
skill  in  the  management  of  the  business,  they  become  a 
mere  gratuity;  and  the  whole  scheme  works  unfairly 
to  the  employer. 

Sometimes  profit-sharing  arrangements  are  so  con- 
trived that  they  have  the  evident  purpose  of  detaching 
laborers  from  the  trade  unions,  and  of  hamper-  Further  con- 
ing their  freedom  of  action.  When  participa-  siderations. 
tion  in  profits  is  deferred  for  a  period  of  years,  or  confined 
to  operatives  who  have  been  in  the  employ  of  the  firm 
for  a  considerable  length  of  time,  the  effect  of  the  plan 
is  too  obvious  to  need  discussion.  Moreover,  if  the 
prospect  of  sharing  in  profits  is  held  forth,  laborers  are 
less  likely  to  demand  higher  wages  at  times  when  work- 
men in  other  establishments  are  securing  advances ; 
and  it  has  often  turned  out,  when  profit  sharing  has 
lasted  for  a  number  of  years,  that  the  stipulated  wage 
paid  each  employee  plus  his  share  in  the  profits  was  no 
more  than  the  market  rate  of  wages.     In  some  instances 


538  THE  LABOR   PROBLEM 

profit  sharing  has  increased  the  remuneration  of  laborers 
and  promoted  a  better  understanding  between  employers 
and  employees,  but  it  has  more  often  disappointed  the 
hopes  of  its  advocates.  As  a  general  solution  of  the 
labor  problem,  it  is  hardly  entitled  to  serious  con- 
sideration. 

§  219.  "Welfare  work"  is  the  comprehensive  title 
given  to  a  great  number  of  means  by  which  the  employer 
Welfare  endeavors  to  enlist  the  interest  of  his  em- 
work,  ployees  in  the  prosperity  of  his  business.  No 
formal  agreement  for  a  division  of  profits  is  made,  as 
in  profit  sharing,  but  the  employer  of  his  own  initia- 
tive seeks  to  make  employment  attractive  to  laborers. 
Lunch  rooms  are  opened,  where  lunch  is  served  at  cost, 
rest  rooms  are  provided  for  female  employees,  and  an 
emergency  hospital,  often  with  a  company  physician 
and  trained  nurse,  is  provided  for  all.  Care  is  taken 
to  afford  to  employees  the  best  lighting  and  sanitary 
conditions  within  the  plant  and  attractive  surroundings 
without.  Athletic  and  dramatic  clubs  are  encouraged, 
or  a  club  may  be  organized  and  provided  with  a  build- 
ing equipped  with  reading  rooms,  card  rooms,  billiard 
hall,  and  bowling  alley,  and  accommodations  for  as- 
semblies, theatricals,  and  dancing,  the  whole  being 
surrounded  by  extensive  grounds  for  athletic  sports. 
Loans  may  be  made  on  favorable  terms  to  such  em- 
ployees as  desire  to  build  homes,  or  land  provided  for 
such  as  wish  to  add  to  their  real  income  by  raising 
vegetables.  In  some  cases,  even,  a  share  in  the  respon- 
sibility of  management  in  matters  pertaining  to  the 
relations  of   employer  and  employed   has  been   given 


RELA770N-  OF  LABORERS  TO   THE  PRODUCT    339 

to  a  committee  of  the  employees.  It  is  the  opinion  of 
many  far-sighted  employers  that,  quite  apart  from  any 
philanthropic  motive,  outlays  of  money  in  such  direc- 
tions are  justified  as  sound  business  policy.  By  thus 
making  the  conditions  of  work  attractive,  employers 
who  adopt  these  methods  secure  "the  pick  of  the  la- 
borers," the  employees  are  more  contented  and  hence 
more  efficient,  and  strikes  are  lessened.  The  increas- 
ing number  of  plants  that  are  adopting  some  form  of 
welfare  work  is  encouraging  testimony  to  the  success 
of  this  method  of  mitigating  the  stress  of  industrial 
warfare,  though  no  more  than  profit  sharing  can  it  be 
expected  to  result  in  a  complete  solution.  Care  should 
be  taken  to  a,void  a  patronizing  attitude  towards  em- 
ployees. It  is  better  that  they  should  be  given  to  under- 
stand that  welfare  work  is  undertaken  as  a  strictly 
business  proposition.  Towards  the  whole  matter  or- 
ganized labor  maintains  a  aeutral  or  somewhat  critical 
attitude.  If  welfare  work  is  attempted  as  a  cover  for 
low  wages  or  the  disruption  of  a  labor  organization,  it 
will  meet  with  prompt  opposition  and  is  probably  fore- 
doomed to  failure. 

"Scientific   management"   is   the   name   given    to   a 
comprehensive  scheme,  proposed  by  the  late  Frederick 
W.  Taylor,  for  reorganizing  industry  in  the      . 
interests  of  employers,  laborers,  and  society  manage- 
at  large.     It  is  based  upon  the  undoubtedly 
sound  economic  principle  that  employers,  laborers,  and 
society  do  in  fact  have  a  ((jniinon  iiikTcsl  in  so  order- 
ing industrial  life  that  the  jjroductive  cflkiency  of  labor 
shall  be  made  as  large  as  possible.     It  is  obvious  that 


340  THE  LABOR  PROBLEM 

there  is  a  possibility  of  securing  for  all  a  larger  income 
when  the  total  product  is  made  larger.  Conflict  of 
interest  arises  because  each  endeavors  to  secure  for 
himself  the  lion's  share  of  this  sum  total.  But  Mr, 
Taylor  held  that,  by  substituting  for  autocratic  control 
by  employers  a  system  based  upon  dispassionate  scientific 
investigation,  the  interests  of  the  several  participants 
may  be  harmonized  with  respect  to  distribution  as  well 
as  production.  There  is,  he  thought,  a  just  and  scien- 
tifically ascertainable  share  of  the  increased  product  of 
industry  arising  from  his  improved  methods  which 
should  accrue  to  employers,  laborers,  and  the  general 
public.  His  scheme,  in  brief,  is  as  follows.  First, 
approaching  from  the  standpoint  of  p/oduction,  he 
requires  a  thorough  reorganization  of  any  plant  which 
adopts  his  methods,  with  respect  to  accounting,  selec- 
tion and  location  of  tools  and  machinery,  and  the  dis- 
position of  the  labor  force.  Then  time  and  motion 
studies  are  made  of  the  workers  and  each  one  is  in- 
structed to  follow  implicitly  the  direction  of  his  "func- 
tional foreman"  as  to  methods  of  work,  tools  employed, 
and  active  and  rest  periods,  with  a  view  to  securing  from 
him  his  maximum  efficiency  without  fatigue.  Secondly, 
approaching  from  the  standpoint  of  distribution,  a 
"task"  is  set,  based  on  the  above-mentioned  time  and 
motion  studies,  and  the  worker  who  in  a  day  accom- 
plishes merely  the  task  or  less  is  paid  a  basic  time  wage, 
but  for  any  amount  of  work  accomplished  beyond  the 
task  a  considerable  bonus  is  allowed,  sometimes  adding 
to  the  normal  wage  as  much  as  sixty  per  cent.  Mr. 
Taylor  was  of  the  opinion  that  for  every  kind  of  work 


RELATION  OF  LABORERS  TO   THE  PRODUCT    341 

there  is  a  maximum  efficiency  wage,  and  that,  if  a  worker 
is  paid  either  more  or  less  than  this,  his  work  will  be 
found  to  be  less  efficient.  As  to  society  at  large,  it  also 
will  share  in  the  advantages  of  scientific  management. 
as  competition  among  employers  reduces  the  price  of 
the  commodities  produced. 

From  the  above  outline  it  is  clear  that  scientific 
management  requires  for  its  success  the  hearty  coopera- 
tion of  employers  and  laborers.     When  such  ^,       .    ^ 

^     •'  The  attitude 

cooperation  has  been  secured,  remarkable  of  organized 
results  have  been  obtained.  Unfortunately 
it  has  so  far  been  obHged  to  encounter  the  almost  unan- 
imous opposition  of  organized  labor.  The  workers  fear 
that  it  is  simply  a  device  of  employers  for  "speeding," 
though  in  justice  to  Mr.  Taylor  it  should  be  stated  that, 
if  speeding  beyond  the  point  of  fatigue  is  permitted,  it 
is  not,  in  his  view,  scientific  management.  Moreover, 
the  frank  appeal  to  individualism  implied  in  the  bonus 
system  is  calculated  to  weaken  the  collective  spirit 
which  is  the  heart  of  trade  unionism,  and  the  unions 
fear  its  disruptive  influence.  Finally,  the  submission 
to  the  functional  foreman  is  distasteful.  The  worker 
seems  to  himself  to  sink  from  the  dignity  of  a  skilled 
artisan  to  a  part  of  an  inanimate  machine.  He  fears 
that  he  will  lose  the  benefit  which  he  has  enjoyed  in 
possessing  a  knowledge  of  the  "mysteries"  of  his  craft. 
The  control  of  an  industry  by  cold  scientific  principles 
imagined  by  Mr.  Taylor  is  too  ideal.  Control  is,  and 
probably  always  will  be,  exercised  by  human  beings 
liable  to  errors  of  judgment  and  warped  by  interest. 
If  some  middle  ground  can  be  found  in  accordance  with 


342 


THE  LABOR  PROBLEM 


which  organized  labor  may  be  recognized  and  have  a 
share  in  the  responsibihty  of  passing  judgment  upon 
the  vahdity  of  the  alleged  scientific  conclusions  derived 
from  the  time  and  motion  studies  and  applied  in  the 
"differential  time  wage,"  this  promising  improvement 
in  the  methods  of  production  may  be  expected  to  make 
more  rapid  progress. 

§  220.    Cooperation  (§  34)  proposes  to  remove  friction 
between  employer  and  employee  by  eliminating  the  em- 
ployer.    It  is  usually  said  to  have  two  forms, 

Cooperation.     ,.       „        ,  ,  ,         .  --m       r 

distributive  and  productive.  The  former  at- 
tacks the  labor  problem  from  the  side  of  the  laborer  as 
consumer.  The  most  successful  attempt  in  this  di- 
rection is  found  in  the  Rochdale  movement  in  England. 
Distributive  Starting  in  1844  with  twenty-eight  laborers 
cooperation.    ^^^^  |jy  ^^^i^  ^f  severe  economy  succeeded  in 

saving  a  small  capital  of  £28  and  set  up  a  cooperative 
retail  store,  the  movement  has  grown  until  now  the 
cooperators,  2,700,000  in  number,  in  their  retail  and 
wholesale  stores,  ocean  transportation,  and  manufactur- 
ing, do  a  business  of  about  £116,000,000  per  annum. 
Distributive  cooperation  of  the  Rochdale  type  has  met 
with  more  or  less  success  in  Belgium,  the  United  States, 
and  other  countries.  The  value  of  distributive  coopera- 
tion in  its  bearing  on  the  labor  problem  (aside  from  the 
addition  which  it  affords  to  the  workman's  real  income) 
has  so  far  lain  chiefly  in  its  educative  effects  upon  groups 
of  laborers  in  sound  business  methods  of  collective 
action.  It  is  the  hope  of  the  Rochdale  cooperators  that, 
approaching  from  the  side  of  demand,  they  will  eventu- 
ally solve  also  the  larger  problem  by  establishing  .farms 


RELATION  OF  LABORERS  TO   THE  PRODUCT     343 

and  factories  to  supply  the  certain  and  steady  market 
created  by  their  wholesale  and  retail  stores.  Successful 
beginnings  have  already  been  made  in  this  direction, 
though  the  farms  and  factories  so  far  established  are 
not  cooperative,  and  the  Rochdale  cooperators  here 
appear  simply  as  employers  of  labor. 

The  direct  approach,  productive  cooperation  proper, 
on  the  other  hand,  is  a  serious  attempt  to  grapple  with 
the  problems  of  labor.  Societies  of  working-  Productive 
men  contributing  some  capital,  and  often  cooperation. 
borrowing  a  part,  have  developed  in  England  a  number 
of  prosperous  enterprises,  and  have  sometimes  suc- 
ceeded in  the  United  States.  In  France,  Belgium,  and 
a  few  other  countries  experiments  with  cooperative 
production  are  now  being  tried  on  a  considerable  scale. 

Whenever  cooperative  enterprise  is  practicable,  it  pos- 
sesses very  obvious  advantages  over  the  wage  system. 
Self-employed  workers  have  shown  activity  i^g  advan- 
and  zeal  that  hired  laborers  seldom  exhibit,  **^®^' 
frugality  and  saving  have  been  encouraged  by  the  strong- 
est possible  inducements,  while  the  responsibility  of  pro- 
prietorship and  the  experience  in  business  management 
have  had  an  excellent  moral  and  intellectual  influence 
upon  the  cooperators.  The  system,  of  course,  eliminates 
strife  between  the  employing  and  laboring  classes. 

But  many  difficulties  beset  the  path  of  cooperators. 
The  success  of  any  enterprise  depends  inevitably  upon 
the  ai;ility  with    which    it    is  managed,  and  its  difficui- 
cooperators  must  contrive  somehow  to  secure  *'®^- 
the   most    efficient  leadershij)  if  they  h()i)e  for  success 
They  may  appoint  a  shop  committee  to  direct  their  affairs 


344  THE  LABOR  PROBLEM 

or  secure,  from  their  own  ranks  or  elsewhere,  a  superin- 
tendent or  manager.     With  the  committee  system  respon- 
sibility and  power  are  divided ;    and  with  both  systems 
the  management  may  be  hampered  by  differences  of 
opinion   among   the   rank  and  file  of   the    association. 
Then,  too,  when  able  managers  are  found,  cooperators 
are  not  always  willing  or  able  to  pay  enough  to  retain 
the  services  of  such  men.     In  many  cases,  also,  it  has 
been  hard  for  managers  who  owe  their  positions  to  the 
good  will  of  the  men  under  their  direction  to  enforce 
the    best    of    discipline.     In    general,    cooperation    has 
succeeded  best  in  industries  of  a  less  complex  character, 
where  skillful  management  counts  for  less  and  efficient 
workmanship  is  of  more  avail.     Finally,  it  is  difficult 
for  laborers  to  secure,  especially  at  critical  times,  the 
capital  needed  to  establish  and  develop  their  enterprises. 
Not  infrequently  when  conspicuous  success  has  been 
attained,  the  very  need  of  additional  capital  to  extend 
the  undertaking  has  resulted  in  the  control  of  the  estab- 
lishment passing  to  outside  capitalists,  and  true  coopera- 
tion has  thus  come  to  an  end.     Up  to  the  present  time 
the  various  difficulties  here  enumerated  have  usually 
circumscribed  narrowly  the  field  within  which  coopera- 
tive   production    can    succeed.     The    system    is,    un- 
doubtedly, an  ideal  one  whenever  practicable;  but  for 
a  long  time  to  come  the  large  majority  of  business  under- 
takings will  be  managed  by  the  entrepreneur,  who  seems 
best  able  to  insure  to  society  efficient  direction  of  its 
productive  forces,  the  efficient  direction  of  which  forces 
is  one  of  the  great  questions  confronting  modern  society 
in  relation  to  its  industrial  problems. 


RELATION  OF  LABORERS   TO    THE  PRODUCT     345 

FOR  SUPPLEMENTARY  STUDY 

General :  Hadley,  Economics,  336-369,  404-421 ;  Seager,  Intro- 
duction to  Economics,  385-433  ;  Taussig,  Principles  of  Eco- 
nomics, Bk.  VL 

Special :  Adams  and  Sumner,  Labor  Problems ;  Commons,  Trade 
Unionism  and  Labor  Problems ;  Oilman,  Methods  of  Indus- 
trial Peace ;  Groat,  Organized  Labor  in  America ;  Rae, 
Eight  Hours  for  Work  ;  Report  of  the  Industrial  Commission, 
XIX,  723-956;  ScHLOSS,  Methods  of  Industrial  Remunera- 
tion ;  Webb,  Industrial  Democracy. 

QUESTIONS 

1.  What  changes  can  be  noted  in  the  character  of  labor  legis- 
lation enacted  in  the  United  States  in  recent  as  compared  with 
earUer  times  ? 

2.  Why  has  the  development  of  labor  organizations  in  the 
United  States  been  slower  than  in  Great  Britain  ? 

3.  Would  a  law  limiting  the  number  of  hours  that  you  could 
work  limit  your  liberty  ? 

4.  What  can  be  said  for  and  against  compulsory  arbitration 
of  labor  disputes  arising  in  public-service  industries  like  railroads 
or  street  railways  ? 

5.  What  proposed  methods  of  improving  the  relations  between 
laborers  and  employers  impress  you  as  the  most  promising? 


CHAPTER  XIV 

PROJECTS   FOR  ECONOMIC   REFORM 
I.  The  Single  Tax 

§  221.  At  various  times  it  has  been  proposed  to  alter 
radically  the  present  distribution  of  wealth,  and  at  present 
Land  nation-  two  projects  enlist  more  or  less  public  interest, 
ahzation.  ^^le  single  tax  and  socialism.  About  1870 
a  movement  was  started  in  England  in  favor  of  land  nation- 
alization. An  organization  known  as  the  Land  Tenure 
Reform  Association,  of  which  John  Stuart  Mill  became 
the  president,  proposed  that  the  state  should  take,  by 
taxation,  the  future  increase  of  land  rentals,  and  that 
present  owners  should  be  given  the  option  of  "relinquish- 
ing their  property  to  the  state,  at  the  market  value  which 
it  might  have  acquired  at  the  time  when  the  project  should 
be  adopted  by  Parliament."  The  Association  claimed 
that  its  plan  v/as  both  just  and  desirable  because  the 
growth  of  ground  rent  (economic  rent  in  the  strict  sense) 
is  due  to  the  progress  of  society  in  population  and  wealth, 
and  not  to  "any  effort  or  outlay  by  the  proprietors." 

§  222.   Some  years  later  Mr.  Henry  George,  in  a  work 

which  gained  a  large  number  of  readers,  urged  that  the 

The  single       State  should    not  only  take   by  taxation    the 

future  increase  of  land  rent,  but  should  seize 

gradually  ^he  present  economic  rent  of  land,  or  at  least 

346 


THE  S/NGLE  TAX  347 

go  much  of  it  as  should  be  needed  to  defray  al'  public 
expenditures  conceived  upon  a  somewhat  elaborate  scale. 
His  purpose  would  be  accomplished  by  abolishing  all 
other  taxes,  and  imposing  on  land  a  single  tax  equal  sub- 
stantially to  its  economic  rent,  or  such  a  proportion  of 
it  as  might  be  required.  He  denied,  moreover,  the  justice 
or  necessity  of  compensating  landowners  for  the  losses 
occasioned  in  the  execution  of  the  plan,  so  that  in  scope 
and  in  method  of  operation  his  proposals  were  far  more 
radical  than  those  of  the  Land  Tenure  Reform  Association, 
which  had  commanded  the  support  of  such  an  eminent 
economist  as  Mill. 

Mr.  George,  in  expounding  this  scheme,  argued  vigor- 
ously that  all  men  should  have  absolute  rights  of  pos- 
session over  the  products  of  their  labor  and  Mr.  George's 
capital,  even  denying  the  justice  of  a  rax  that  ^'■e"™e°*s 
falls  upon  anything  that  a  person  has  produced.  He  urged, 
however,  that  rent  is  not  the  product  of  any  man's  labor, 
but  the  result  of  social  growth  and  activity  by  which  the 
demands  upon  land  are  increased  and  its  value  enhanced. 
Since  the  community,  in  this  view,  creates  rents,  it  should 
reserve  them  for  public  uses,  and  not  allow  them  to  be 
diverted  into  the  pockets  of  private  individuals.  Mr. 
Geor7e  attributed  poverty  and  other  social  ills  to  the  fact 
that  lanrlowncrs,  contributing  nothing  to  the  product 
of  in  Justly,  are  allowed  to  claim,  as  society  advances, 
an   increased  share  of  the  proceeds.^     He  looked   upon 

'  vTr.  George's  statement  of  the  case  was  as  follows:  "The  reason  whyi 
\n  spite  of  the  increase  of  productive  pmver,  wages  constantly  tend  to  a 
minimum  which  will  give  but  a  bare  living,  is  that,  with  increase  in  pro- 
ductive power,  rent  tends  to  even  greater  increase,  thus  producing  a  coa 


348  PROJECTS  FOR  ECONOMIC  REFORM 

the  single  tax  as  the  panacea  for  all  evils  that  can  in  any 
way  be  removed  by  social  action,  and  denounced  private 
ownership  of  land  as  robbery.  Written  with  great  power 
and  even  eloquence,  his  writings  have  gained  for  him  a 
considerable   number   of  disciples. 

§  223.    Passing  over  the  metaphysics  of  the  question, 

it  is  tolerably  evident,  first  of  all,  that  there  is  a  hiatus 

between  the  proposition  ihat  rent  is  an  unearned 

Criticism. 

income,  and  the  proposal  to  confiscate  existing 
rents.  Rent  is  not  the  only  unearned  income;  inherit- 
ances, gifts,  and  some  speculative  gains  are  obtained 
without  exertion  on  the  part  of  the  recipient.  The  right 
of  private  property,  therefore,  does  not  depend  for  its 
justification  merely  upon  the  fact  that  the  objects  owned 
are  the  products  of  the  owner's  labor;  it  depends  at  all 
times  upon  considerations  of  social  expediency,  and  upon 
such  grounds  private  ownership  of  land  has  been  con- 
sidered by  most  people  to  be  justifiable.  If  the  belief 
in  the  good  effects  of  private  ownership  is  a  mistake, 
it  would  follow  that  society  would  do  well  to  correct  the 
error;  but  it  would  not  follow  that  the  whole  burden  of 
the  change  should  be  thrown  upon  those  persons  who, 
in  entire  good  faith  and  in  accordance  with  the  will  of 
the  community  as  expressed  in  law,  had  invested  their 
fortunes    in    land.     Appropriating    existing    land    values 

stant  tendency  to  the  forcing  down  of  wages."  —  Progress  and  Poverty, 
Bk,  V,  Chap.  2.  By  the  "  forcing  down  of  wages,"  Mr.  George  means 
either  an  actual  decrease,  or  a  failure  of  wages  to  increase  as  rent  in- 
creases, i.e.,  a  relative  decrease. 

^  It  is  not  true  in  all  senses  of  the  term  that  rents  are  invariably  un- 
earned incomes,  as  we  have  seen  (§  196).  That  there  is  a  very  large 
unearned  increment,  however,  c  specially  in  cities,  is  conceded  to  Mr.  George, 


THE  SIiVGLE  TAX  349 

without  compensation  is  not  to  be  thought  of,  even  though 
the  rest  of  Mr.  George's  arguments  commanded  our 
assent. 

But  it  is  clear  that  Mr.  George  exaggerated  the  evils 
that  follow  private  ownership  of  land,  and  overlooked 
entirely  the  benefits  which  have  resulted  from  Further 
it.  If  we  concede,  as  we  must,  that  the  usual  <^"**''^^™- 
efifect  of  progress  is  to  increase  the  value  of  the  land,  it 
does  not  follow  necessarily  that  the  proportionate  share 
of  the  landlord  in  the  product  of  industry  increases.  The 
landlord  receives  a  higher  rent  for  his  land,  but  the  prod- 
uct obtained  from  it  may  have  increased  in  equal,  or  even 
greater,  proportion,  so  that  the  share  of  the  total  product 
received  by  the  landlord  may  be  no  larger  than  before. 
Until  it  can  be  shown  that  rent  not  only  increases,  but 
increases  more  rapidly  than  the  product  of  industr}',  it 
cannot  be  demonstrated  that  the  growth  of  the  land- 
owner's income  is  the  cause  of  poverty.  As  a  matter 
of  fact,  for  a  generation  or  more,  wages  have  been  steadily 
advancing  in  the  United  States  and  other  progressive 
countries  at  the  same  time  that  rents  have  increased. 

Then,  too,  it  should  never  be  overlooked  that,  whatever 
evils  may  have  resulted  from  it,  private  property  in  land 
has  furnished  the  great  stimulus  for  the  devel-   Advantages 
opment  of  the  natural  resources  of  the  United  "anTownV 
States.     The    rise    in    land    values    following  ^^'P' 
the  establishment  of  each  new  settlement  has  lured  hosts  r 
of  people  into  the  wilderness,  and  has  been  a  not  inappro- 
priate   reward    for    the    hardships   of   pioneer   days.     In ' 
addition    to   this    fact,    when    land    ownership    is    widely 
distributed,  as  in  this  country,   the  increment    of   value 


350  PROJECTS  EOk  ECOmMIC  REFORM 

that  results  from  social  progress  is  sure  to  be  widelv 
distributed.  Moreover,  the  desire  to  secure  a  small  farm 
or  a  site  for  a  house  has  been  the  principal  incentive  to 
industry  and  thrift  for  milHons  of  people ;  and  the  acquisi- 
tion of  a  Httle  land  has  not  only  started  many  families 
on  the  road  to  a  competency,  but  also  created  a  vast  body 
of  prosperous,   conservative,   and  law-abiding  citizens. 

§  224.  From  a  practical  point  of  view,  great  difficul- 
ties would  be  encountered  in  the  effort  to  apply  the  single 
.    .    ^     ,     tax   to   agricultural  land.     After   a   farm   has 

Agricultural  " 

and  urban  been  under  cultivation  for  many  years,  it  is 
extremely  difficult  to  determine  what  part  of 
the  so-called  rent  which  it  yields  is  the. mere  value  of  the 
site,  and  what  represents  the  interest  on  capital  expended 
In  improvements.  Barns  and  fences  can  without  difficulty 
be  valued  separately ;  but  labor  sunk  in  clearing,  ditching, 
removing  stones,  and  fertilizing  defies  accurate  computa- 
tion. The  best  that  could  be  done  would  be  to  apply 
some  sort  of  rough  estimate  which  would,  in  numberless 
cases,  do  great  injustice  to  landowners  or  impair  seri- 
ously the  revenue  received  by  the  government.  In  cities, 
of  course,  this  difficulty  would  not  arise,  since  it  is  possi- 
ble to  place  separate  ■■  a,luations  upon  building  lots  and 
improvements,  as  is  done  to-day  by  the  assessors  in 
Boston  and  New  York. 

§  225.  If  the  proposal  to  confiscate  existing  rents  must 
be  rejected  as  unjust,  the  same  criticism  cannot  be  directed 
The  future  ^^  projccts  for  gradually  appropriating  to 
increment  of    public  purposes  the  future  increment  of  land 

land  values.  ... 

values.     The  only  question  involved    here    is 
the  desirability  and  practicability  of  such  a  change  in 


THE  SINGLE  TAX  351 

the  policy  of  the  government.  The  practical  difficulties 
in  the  way  of  separate  valuation  of  land  and  improve- 
ments are,  for  the  present  at  least,  a  decisive  objection 
to  the  apphcation  of  the  scheme  to  agricultural  holdings. 
With  urban  land  this  difficulty  disappears;  while  here 
the  amount  of  the  future  increment,  and  consequently 
the  importance  of  the  proposal,  are  decidedly  greater. 
To  buy  out  present  owners,  at  such  values  as  munici- 
palities are  obliged  to  pay  for  land  taken  for  city  pur- 
poses, would  involve  communities  with  a  stationary  or 
slowly  increasing  population  in  a  hazardous  speculation, 
even  though  a  city  that  was  growing  with  great  rapidity 
might  safely  undertake  such  a  venture.  But  to  adjust 
municipal  taxation  in  such  a  manner  as  to  intercept  a 
considerable  part  ^  of  the  future  unearned  increment  from 
land  would  be  a  safe  and  probably  a  desirable  poUcy. 
This  would  place  a  part  of  the  increasing  burden  of  city 
taxation  upon  an  object  that  derives  its  value  from  munici- 
pal growth,  and  not  from  individual  effort;  it  would  do 
no  injustice  to  present  owners;  and  would  make  it  pos- 
sible in  growing  communities  to  reduce  the  pressure  of 
taxes  upon  business  enterprises.  It  would,  moreover,  be 
in  line  with  some  of  the  existing  tendencies  in  municipal 
finance. 

§  226,   In  passing  judgment  upon  Mr.   George's  pro- 

^  The  whole  of  the  future  increase  of  rentals  could  not  be  taken  with- 
out injustice  to  present  proprietors.  The  purchase  jirice  paid  for  land  in 
a  progressive  city  is  somewhat  greater  than  its  capitalized  present  rental 
Taiue,  since  the  purchaser  can  and  must  pay  more  in  view  of  the  prospec- 
tive increase  of  the  rent.  Some  part  of  the  future  increase,  therefore,  is 
reflected  in  present  capital  values,  and  should  be  left  to  the  present 
owners. 


352  PROJECTS  FOR  ECONOMIC  REFORM 

posals,  we  have  been  unable  to  accept  the  dark  picture 

which  he  has  drawn  of  the  results  of  private  property  in 

land,  and  we  are  obliged,  under  any  circum- 

Conclusion.  .  . 

stances,  to  reject  the  idea  of  taking  existing 
land  values  without  compensation.  It  does  appear, 
however,  that  both  Mr.  George  and  the  English  Land 
Tenure  Reform  Association  have  pointed  to  a  highly 
eligible  object  for  special  taxation.  When  it  is  conceded 
that  the  past  increment  of  land  values  is  beyond  the  reach 
of  any  just  exercise  of  the  taxing  power,  the  question 
remains :  What  policy  should  be  pursued  with  reference 
to  the  future  increase  of  ground  rent?  So  far  as  urban 
lands  are  concerned,  there  can  be  little  doubt  that  it  is 
the  part  of  wisdom  for  municipalities  to  seize  upon  a 
source  of  revenue  that  is  brought  into  existence  by  urban 
growth  and  to  a  large  extent  maintained  by  constant 
public  expenditure. 

II.  Socialism 

§  227.  More  radical  than  the  single  taxer  in  his  criti- 
cism of  the  existing  distribution  of  wealth,  the  socialist 
Socialism  holds  that  interest  and  profit,  as  well  as  rent, 
defined.  ^^^  unearned  incomes  unjustly  extorted  from 

the  persons  whose  labor  creates  all  the  wealth  that  is 
brought  into  existence.  Socialism,  therefore,  contem- 
plates such  a  reorganization  of  economic  society  as  shaU 
bring  all  the  instruments  of  production,  capital  as  well  as 
land,  under  collective  ownership  ;  replace  private  enter- 
prise by  public  management  of  all  important  industries; 
effect  a  just  distribution  of  the  social  income;  and  per- 
mit private  ownership  of  the  consumer's  goods  dealt  out 


SOCIALISM  353 

to  each  worker.  Its  elements  may  be  briefly  stated  as 
common  ownership  of  land  and  productive  capital;  pub- 
he  organization  and  management  of  at  least  all  staple 
industries ;  the  distribution  of  wealth  by  pubhc  authority, 
in  accordance  with  some  principle  regarded  as  just ;  and 
private  property  in  the  incomes  allotted  to  individuals. 

§  228.  Socialism  is  not  a  new  but  a  very  old  theory 
which  has  appeared  and  reappeared  in  one  form  or  another 
ever  since  the  time  of  Plato.     It  has  usually 

Its  history. 

attracted  most  interest  at  times  when  a  sharp 
separation  of  rich  and  poor  has  brought  to  general  atten- 
tion the  unequal  distribution  of  wealth  and  the  problem 
of  poverty ;  although  ideals  of  social  or  pohtical  equality, 
such  as  appealed  to  so  many  persons  in  the  eighteenth 
century,  have  been  another  source  of  sociahstic  theories. 
Plato's  "Republic,"  for  instance,  with  its  proposals  for 
the  extremest  subordination  of  individual  life  to  the  con- 
trol of  the  state,  has  for  its  background  a  bitter  and  pro- 
longed contest  between  rich  and  poor  which  had  long  been 
waged  in  Athens  and  other  Greek  cities.  Again,  in  the 
sixteenth  and  seventeenth  centuries,  the  social  distress 
occasioned  by  widespread  economic  and  political  changes 
evoked  such  works  as  Sir  Thomas  More's  "Utopia"  and 
Campanella's  "City  of  the  Sun";  and  in  the  eighteenth, 
the  misery  that  existed  in  France  made  that  country  a 
fruitful  field  for  socialistic  speculations.  Finally,  in  the 
nineteenth  century,  the  increased  importance  of  capital  and 
the  sharper  separation  of  the  employing  and  the  laboring 
classes  have  prepared  the  ground,  already  sown  with 
democratic  pohtical  ideals,  for  the  growth  of  modern 
Bociahsm. 


354  PROJECTS  FOR  ECONOMIC  REFORM 

§  229.   Socialism  of  the  present  day  is  a  contemplated 

scheme  of  industrial  organization  based  upon  an  analysis  of 

.    ,     the  workings  of  modern  industrial  society.    The 

The  basis  of  °    _  .... 

modern  so  Central  fact  in  the  present  industrial  society  is 
said  to  be  capitalistic  production,  by  which  is 
meant  production  carried  on  with  the  aid  of  so  much  capital 
as  has  come  into  use  since  the  Industrial  Revolution.  Capi- 
talistic production^  the  socialist  holds,  has  divided  society 
into  two  classes,  those  who  own  land  or  capital  and  those 
who  do  not,  the  latter  being  dependent  upon  the  former 
for  an  opportunity  to  employ  their  labor.  Between  capi- 
talist and  laborer,  consequently,  there  has  arisen  a  class 
struggle,  in  which  the  owner  of  capital  exploits  the  labor 
of  the  hired  workman  to  his  own  advantage ;  while  the 
workman,  oppressed  with  long  hours  of  toil  and  low  wages, 
endeavors  vainly  to  improve  his  position  so  long  as  the 
existing  system  continues.  The  pohtical  and  industrial 
history  of  the  nineteenth  century,  it  is  alleged,  is  nothing 
but  a  record  of  the  various  phases  which  the  warfare 
between  the  capitalists  and  the  laborers  has  assumed ; 
while  the  only  clew  to  the  development  of  the  twentieth 
is  to  be  gained  from  a  study  of  the  probable  tendencies  of 
this  class  conflict. 

The  machinery  by  which  the  capitalist  succeeds  in  ex- 
ploiting the  laborer  is  the  wages  system.     Socialists  hold 
that  the  entire  product  of  industry  is  to  be  attrib- 

Alleged  ex-  ^  ^  •'  ^ 

pioitation  of  utcd  to  labor,  and  that  capital  is  nothing  but  a 
certain  amount  of  labor  embodied  in  a  tool  or 
machine.  But  under  the  wages  system  the  laborer  does  not 
receive  all  that  he  produces,  because  the  employer  manages 
to  withhold  a  part  as  compensation  for  the  use  of  his 


SOCIALISM  ^55 

capital.*  The  result  is  that,  whereas  a  laborer  by  working 
three  or  four  hours  could  produce  all  the  wages  that  he 
actually  receives,  the  employer  keeps  him  at  work  for 
nine  or  ten  hours  and  appropriates,  under  the  name  of 
rent,  interest,  or  profits,  the  surplus  product  of  the  addi- 
tional time.  Such  a  contract,  though  disadvantageous 
to  the  laborer,  is  forced  upon  him,  the  sociahst  declares, 
by  his  poverty  and  inability  to  hold  out  for  better  terms. 
If  it  ever  happens  that  favorable  circumstances  enable  a 
laborer  to  secure  a  wage  that  will  somewhat  more  than 
cover  the  bare  living  expenses  of  himself  and  family,  the 
growth  of  population  speedily  forces  the  rate  down  again 
to  the  minimum  required  for  mere  existence,  so  that 
in  fact,  by  an  iron  law,  the  wages  system  dooms  the  laborer 
to  an  unsatisfactory  and  precarious  position. 

The  only  salvation  for  the  laborer,  according  to  the 
socialist,  is  to  acquire  poHtical  power  and  to  take  posses- 
sion of  the  instruments  of  production  by  which  The  remedy 
he  is  now  "enslaved."  Through  the  estab-  P™P°sed. 
lishment  of  what  is  called  the  cooperative  commonwealth, 
the  workers  can  secure  access  to  land  and  capital  without 
paying  tribute  to  landlord  or  capitalists  ;  and  socialists  are 
now  addressing  themselves  actively  to  the  work  of  stirring 
up  class  feeling  among  laborers  and  impressing  upon  them 
the  necessity  for  independent  political  action.  In  Germany, 
where  the  movement  has  made  the  most  progress,  no  less 
than  3,000,000  votes  were  cast  at  the  election  of  1903  for 
socialist  members  of  the  Reichstag  ;   while  in  Belgium, 

'  That  is,  he  witlihuMs  somethinfj  in  excess  ofwliat  is  nccde<l  to  replatd 
ihe  labor  expended  in  lirodming  the  capital  cnnsunieil  in  pruduction.  Tc 
\he  mere  replacement  of  capital  he  is,  ol  course,  entitled. 


356  PROJECTS  FOR  ECONOMIC  REFORM 

France,  Italy,  and  the  United  States  the  adherents  of 
socialist  parties  are  now  numbered  by  the  hundreds  of 
thousands. 

§  230.  Present-day  sociahsts,  while  proclaiming  the  ne- 
cessity for  independent  political  action  by  laborers,  believe 
The  alleged     that  their  cooperative  commonwealth  must,  in 

tendency 

toward  so-  ^ny  event,  be  established  ultimately  by  the 
ciahsm.  j^gj.g  operation  of  economic  forces  —  the  forces 

of  capitalism  itself.  The  advantages  of  large-scale  pro- 
duction are  said  to  be  aggregating  capital  in  larger  and 
larger  masses,  the  big  capitalist  swallowing  scores  of  his 
smaller  competitors;  until  at  last,  through  the  formation 
of  trusts,  a  development  has  begun  which  is  to  destroy 
competition  in  practically  all  parts  of  the  field  of  industry. 
The  result  of  the  present  tendency  toward  concentration 
is  to  be  the  ultimate  control  of  all  industry  by  a  small 
body  of  capitalists,  whose  success  will,  on  the  one  hand, 
prove  the  practicability  of  organizing  business  enterprises 
on  a  national  scale,  and,  on  the  other,  make  the  continu- 
ance of  private  ownership  impossible.  The  trust,  there- 
fore, is  welcomed  as  an  important  factor  in  bringing  about 
the  estabUshment  of  sociahsm,  since  it  is  beheved  to  dem- 
onstrate the  practicability  of  the  scheme  and  to  produce 
an  amount  of  discontent  that  will  finally  lead  to  the  nation- 
alization of  industry. 

§  231.  Sociahsm  is  believed  to  be  a  desirable  thing  for 
the  laboring  classes  since  its  object  would  be  to  give  them 
Supposed  ad-  ^^^  shares  that  now  accrue  to  the  owners  of 
vantages  of     land  and  capital.     But  beyond  this,  it  is  alleged 

socialism.  1  1  • 

that   the   cooperative  organization  of  industry 
would  be  advantageous  because  it  would  avoid  the  waste 


SOCIALISM  357 

occasioned  by  competition.  Production  as  now  organized 
is  criticised  as  planless,  since  producers  often  make  mis- 
takes or  work  at  cross  purposes;  whereas  a  nationalized 
industry  can  be  managed  on  comprehensive  general  plans, 
with  a  minimum  of  wasted  effort.  Needless  expenses,  it 
is  said,  are  now  incurred  in  advertising  and  in  competing 
for  business,  all  of  which  sociahsm  would  render  unneces- 
sary. Moreover,  with  land  and  capital  in  private  owner- 
ship, a  considerable  number  of  persons  are  Hving  upon 
fixed  incomes  and  producing  nothing,  who  would,  under 
the  new  regime,  be  obliged  to  work  or  to  starve.  By  avoid- 
ing waste,  inaugurating  comprehensive  plans,  and  oblig- 
ing every  one  to  work,  it  is  claimed  that  socialism  would 
make  the  production  of  wealth  so  large  that  all  workers 
would  be  assured  incomes  adequate  for  the  satisfaction 
of  every  rational  want,  even  with  a  far  shorter  working 
day  than  prevails  at  present.  From  the  standpoint  of 
production,  therefore,  as  well  as  from  that  of  distribution, 
socialism  is  regarded  as  the  ideal  method  of  economic 
organization. 

§  232.  In  criticism  of  current  socialist  theories  we  may 
begin  conveniently  with  the  idea  of  an  alleged  irrepressible 
class  conflict  arising  from  the  systematic  ex-  criticism  of 
ploitation  of  the  laborer.  That  there  is  a  ^^^^^s"- 
conflict  of  interests  when  employers  and  employees  come 
to  divide  the  product  of  industry  among  themsel/cs,  can- 
not h)e  denied,  because  the  more  one  party  receives,  the 
less  remains  for  the  other;  but  tiiat  a  fair  division  is  not 
and  cannot  be  effected  under  the  wages  system,  is  a  very 
different  proposition.  The  socialist  alleges  that  the  divi- 
sion is  always  unfair  because   the  capitalist,  producing 


358  PROJECTS  FOR  ECONOMIC  REFORM 

nothing,  withholds  from  the  workman  a  part  of  the  prod- 
uct of  his  labor.  The  argument  rests  upon  the  idea  that 
labor,  and  nothing  but  labor,  contributes  to  the  produc- 
tion of  a  commodity;  and  that  the  value  of  a  product 
depends  solely  upon  the  amount  of  labor  required  for  its 
production.  A  more  absurd  theory  can  hardly  be  found 
in  the  history  of  economic  speculation.  The  value  of  a 
product  does  not  depend  solely  upon  its  cost  of  production; 
although  that  is  the  factor  which  controls  the  supply  and, 
therefore,  jointly  with  the  marginal  utihty,  determines  the 
value.  Furthermore  the  cost  of  production  includes 
something  more  than  mere  labor,  because  abstinence,  or 
waiting,  is  just  as  real  and  necessary  a  part  of  the  sacrifices 
incurred  by  producers  as  the  physical  energy  expended  by 
the  workman.  The  illustration  given  in  another  place 
(§  64)  should  have  made  this  point  tolerably  clear.  ^ 

When  due  account  is  taken  of  the  sacrifice  represented 
by  abstinence,  or  waiting,  and  of  the  risks  which  the  en- 
trepreneur  assumes  when  he  establishes  an  independent 

^  Another  illustration  may  be  taken  from  the  same  acute  writer,  Boehm- 
Bawerk,  from  whom  we  have  drawn  the  one  given  in  §  64.  A  cask  of  new 
wine  sells  for  $30,  and  the  socialist  would  regard  all  of  this  sum  as  a  value 
created  by  labor  alone.  A  capitalist  buys  this  cask  and  sets  it  aside  for 
twenty  years,  the  wine,  meanwhile,  improving  with  age  until,  at  the  expira- 
tion of  the  period,  it  sells  for  $100.  Upon  the  theory  of  the  socialist,  it  is 
impossible  to  explain  how  the  difference  of  $70  was  added  to  the  value  of 
the  wine,  since  no  labor  has  been  expended  from  the  day  that  this  cask 
was  placed  in  the  cellar  in  order  that  it  might  age.  The  socialist,  too, 
denies  that  any  sacrifice  is  called  for  on  the  part  of  the  man  who  invested 
$2,0  in  such  a  way  that  nothing  was  secured  from  it  for  twenty  years.  His 
theory,  in  fact,  is  that  the  wine  merchant  robs  the  men  who  originally 
produced  the  wine  and  were  paid  all  that  new  wine  was  worth,  unless  he 
turns  over  to  them  the  $70  added  to  the  value  of  the  wine  after  it  has  aged 
for  twenty  years.    ~       •  ...  .... 


SOCIALISM  359 

enterprise,  it  becomes  clear  enough  that  the  laborer  is 
not  necessarily  robbed  when  the  capitalist  and  the  em- 
ployer receive  their  profits.  This  is  not  to  say  The  wages 
that,  as  a  matter  of  fact,  injustice  is  never  done  ^y^*^™- 
to  the  laborer ;  but  simply  that  no  wrong  is  necessarily  done 
him  by  the  action  of  the  employer  in  withholding  a  part 
of  the  product.  There  is  no  iron  law  that  holds  wages 
down  inevitably  to  a  bare  physical  subsistence,  as  is  proven 
by  the  fact  that  the  remuneration  of  labor  has  steadily 
increased  for  half  a  century  or  more,  and  that  the  standard 
of  living  of  the  laboring  classes  has  repeatedly  advanced. 
If  any  class  of  workmen  is  so  improvident  that  its  members 
are  willing  to  rear  large  families  which  they  cannot  support 
in  a  decent  manner,  the  wages  of  that  grade  of  labor  will  be 
low  on  account  of  the  inordinate  increase  of  the  supply  of 
laborers.  If,  however,  laborers  are  intelligent  and  pru- 
dent enough  to  insist  upon  a  comfortable  standard  of 
living,  they  can  keep  their  wages  far  above  the  minimum 
necessary  for  the  mere  maintenance  of  hfe.  If,  in  addi- 
tion, they  are  offered  educational  facihties  and  are  free 
to  combine  for  lawful  ends,  the  working  classes  are  able 
to  maintain  tenaciously  existing  rates  of  wages,  and,  at 
each  favorable  opportunity,  secure  an  increase.  This  is 
so  clear  that  many  socialists  no  longer  contend  that  the 
wages  system  dooms  the  laborer  to  a  life  of  constant  or 
increasing  misery;  and  merely  argue  that,  even  though 
wages  have  risen,  the  worker  is  robbed  simply  by  reason 
of  the  fact  that  the  capitalist  receives  any  part  of  the  prod- 
uct of  industry.  In  fact,  they  now  argue,  in  some  cases, 
that  sociaHsm  never  really  taught  the  theory  of  the  pro- 
gressive impoverishment  of  the  laboring  classes. 


36o  PROJECTS  FOR   ECONOMIC  REFORM 

§  233.  When  one  examines  the  arguments  which  are 
believed  to  prove  the  existence  of  an  irresistible  tendency 
„  .,.  .      ,     toward  socialism,  it  appears  that  most  of  them 

Criticism  of  '  ^ '■ 

the  alleged      turn  upon  the  phenomena  of  large-scale  produc- 

tendency 

toward  so-  tion.  In  the  field  of  natural  monopolies,  it  is 
clear  that  combination  is  the  only  result  to  be  ex- 
pected ;  and  that  its  growth  inevitably  brings  us  to  the  two 
alternatives  of  pubhc  ownership  or  public  regulation,  because 
unregulated  private  monopoly  does  produce  discontent, 
as  the  socialists  aver.  But  even  if  we  concede  that  public 
regulation  of  private  monopolies  is  sure  to  prove  unsatis- 
factory, and  that  pubhc  ownership  is  to  be  the  pohcy  finally 
adopted,  this  still  leaves  the  great  fields  of  agriculture, 
manufactures,  and  commerce  open  to  private  enterprise. 
In  the  industries  last  mentioned  the  sociaHst  thinks  that 
the  trust  movement  will  result  finally  in  the  estabhshment 
of  the  regime  of  monopoly ;  but,  as  has  been  argued  in  an 
earlier  chapter  (§  129),  there  are  the  best  of  reasons  for 
rejecting  such  a  conclusion.  The  force  of  competition 
will  finally  prove,  outside  of  industries  that  are  natural 
monopohes  or  depend  upon  natural  monopoHes,  too 
strong  for  the  calculations  of  both  the  trust  promoter  and 
the  socialist.  It  seems  logical  and  attractive  —  when 
small  industries  are  seen  to  be  gradually  replaced  by  large, 
while  large  enterprises  often  combine  into  trusts  —  to 
affirm  that  there  exists  here  a  natural  and  inevitable  law 
of  development  by  which  production  is  organized  first  in 
small  establishments,  then  in  large,  and  finally  in  estab- 
Hshments  of  the  largest  possible  size  ■ —  monopolies ;  but 
the  facts  of  industrial  growth  are  not,  and  never  have  been, 
so  easily  and  logically  explained.     In  some  cases,  as  in  the 


SOCIALISM  361 

natural  monopolies,  the  course  of  economic  evolution  is 
as  the  socialist  aUeges ;  but  elsewhere  opposing  tendencies 
appear,  and  the  outcome  is  different.  The  theory  of  the 
sociaHst  does  violence  to  the  facts  by  endeavoring  to  ac- 
commodate them  to  a  single  procrustean  formula. 

Sociahsts  draw  a  severe  indictment  against  the  present 
methods  of  organizing  productive  industry,  and  criticise 
them  as  irrational,  planless,  and  wasteful.  That  ^^^  present 
there  is  some  force  in  the  arguments  no  one  can  economic 

regime. 

deny,  since  at  many  pomts  busmess  is  not  con- 
ducted as  efficiently  as  could  be  desired.  Many  of  the 
defects  in  the  present  system,  however,  can  be  remedied; 
and,  in  fact,  are  continually  being  eradicated.  The  col- 
lection of  statistics  of  production  and  consumption,  for 
instance,  and  the  careful  study  of  markets  are  now  pro- 
ceeding upon  a  scale  never  before  known,  and  further 
helpful  developments  in  the  same  hne  are  certain  to  occur. 
Competition,  in  all  probability,  will  always  entail  some 
waste ;  but  this  is  not  an  argument  in  favor  of  sociahsm, 
since  that  system  would  present  still  greater  weaknesses. 
§  234.  Under  a  socialistic  regime  the  government, 
however  it  might  then  be  constituted,  would  have  to  organ- 
ize and  conduct  the  great  staple  industries  upon  weakness  of 
a  national  scale.  This  work  would  involve  ^°'='^^'^™- 
all  the  waste  and  possibihties  of  corruption  that  so  often 
attend  governmental  enterprise;  while  there  is  every 
reason  to  believe  that  the  administration  of  affairs  would 
be,  taken  by  and  large,  less  progressive,  energetic,  and 
efficient  than  at  present.  Doubtless  the  methods  of  public 
administration  can  be  improved,  and  perhaps  they  might 
be  as  its  functions  increased;    but  no  one  who  has  evei 


362  PROJECTS  FOR  ECONOMIC  REFORM 

had  opportunity  to  compare  the  leisurely  methods  of 
the  average  government  office  with  the  conditions  that 
prevail  in  the  average  private  estabhshment  will  believe 
that,  under  sociaHsm,  productive  industry  would  be 
managed  as  efficiently  as  at  present. 

A  further  difficulty  would  be  encountered  when  a  social- 
istic government  should  undertake  to  apportion  the  labor 
Apportion-       ^°^^^  ^^  ^^^  country  among  the  various  occu- 
^^^°t  °f  i^^or  pations.     Some  calHngs  are  more   pleasant  or 
highly  esteemed,  and  would  be  sought  for  much 
more  eagerly  than  others.     All  competitors  for  preferment 
could  not,  obviously,  reach  the  goal  of  their  desire;  and 
there  would  continue  to  be  shattered  hopes  and  disap- 
pointed ambitions,  as  at  present.     Our  existing  system,  by 
a  more  or  less  impersonal  method,  succeeds  fairly  well 
in  eliminating  the  inefficient,  and  securing  the  services 
of  the  most  efficient  in  the  highest  positions.     Favoritism 
and  nepotism  are  far  from  unknown  in  industry,  but  they 
exist  there  to  no  such  extent  as  in  government  service, 
since  the  inevitable  penalty  for  them  is  business  failure. 
Envy  and  discontent  would  continue  to  exist  under  social- 
ism.    They  would  be  stronger,  in  fact,  since  disappointed 
competitors  would  witness  so  many  cases  in  which  advance- 
ment was  secured  through  favoritism  or  corruption.     One 
who  watches  the  multitude  of  toilers  that  pours  into  a 
great  city  each  morning  and  distributes  itself  through  the 
factories,    workshops,    stores,    and    other   .establishments 
awaiting   its   coming,    may   well   feel   thankful    that   the 
hurrying  throng  is  not  seeking  positions  that  are  distrib- 
uted by  the  political  party  that  happens  to  command  a 
majority  of  its  votes. 


SOC/AL/SM  363 

Most  serious  of  all  is  the  fact  that,  with  production  or- 
ganized upon  a  sociaHstic  basis,  the  very  nerve  of  efficient 
industrial  effort  would  be  cut,  at  least  for  the 

Socialism  and 

majority  of  workers.  At  present  we  offer  pecun-  industrial 

cfticibi^cv* 

iarygain  as  a  reward  of  efficiency ;  and,  from  the 
lowest  grade  of  labor  to  the  highest,  we  apportion  a  remu- 
neration that  depends  upon  the  value  of  a  person's  services. 
The  love  for  gain  is  not  the  highest  motive,  but  it  is  better 
than  none;  and  it  seems  to  be  the  one  that  appeals  most 
strongly  to  the  average  man.  Socialists  urge  that,  under 
their  system,  the  desire  for  social  esteem  would  keep  men 
at  work,  just  as  patriotism  and  other  unselfish  motives 
sometimes  operate  to-day.  But  what  we  want  is  not 
merely  that  public  opinion  or  some  other  force  shall  keep 
men  at  work,  but  that  people  shall  exert  themselves  as 
strenuously  as  they  do  at  present  under  the  inducement  of 
personal  gain.  The  picture  of  a  society  in  which  higher 
motives  rule,  and  the  welfare  of  all  is  the  rule  of  action  for 
each,  presents  undoubted  attractions ;  but  we  have  no  ex- 
perience with  human  nature  which  justifies  the  hope  that 
it  will  speedily  be  realized. 

Considered  as  a  scheme  of  distribution,  socialism  pre- 
sents almost  as  grave  difficulties  as  it  offers  when  viewed  as 
a  plan   for  organizino;    production.      Socialists  ^.„      .     . 

'  "  "     '  ....  Difficulties  in 

have  always  clamorcfl   for  a  just  distribution  socialistic 

,    ,  ,  r  •      1  11  1  distribution 

of  the  product  of  industry,  but  have  not  always 
agreed  as  to  what  constitutes  distributive  justice.  At 
present,  however,  they  generally  incline  to  the  view  that 
equality  of  income  woulfl  be  the  fairest  possible  principle; 
and  therefore  earlier  schemes  for  distribution  according 
to  needs  or  mcnt   will  not  detain  us.     In  any  case,  it  is 


364  PROJECTS  FOR  ECONOMIC  REFORM 

probable  that  equality  would  be  the  only  practicable  plan, 
on  account  of  the  difficulties  that  would  follow  if  a  govern- 
ment dependent  upon  popular  suffrage  should  undertake 
to  apportion  weaUh  in  any  other  way.  Now  equality  of 
remuneration  overlooks  the  varying  needs  and  deserts  of  the 
recipients ;  and  no  one  but  the  confirmed  sociaHst  can  be 
impressed  with  the  equity  of  awarding  the  same  compensa- 
tion to  unequal  industry,  talent,  and  skill.  Moreover,  such 
a  method  of  distribution  would  be  likely  to  remove  that 
stimulus  to  invention  and  enterprise  to  which  we  owe  so 
much  of  our  present  economic  progress. 

Socialism,  therefore,  has  fatal  weaknesses  whether  con- 
sidered as  a  scheme  for  the  production  or  for  the  distribution 
Socialism  ^^  Wealth.  It  may  be  suggested,  furthermore, 
dangerous  to    that  the  systcm  would  probably  endanger  free- 

hberty.  1  ./  o 

dom  of  thought  and  action  if  it  should  ever 
be  carried  into  effect.  With  all  branches  of  production 
in  the  hands  of  the  government,  it  would  be  dangerous 
for  any  one  to  criticise  the  poHcy  of  the  public  authorities. 
At  present  people  can  find  in  private  business  a  vantage 
ground  from  which  they  can  safely  criticise  men  and 
measures ;  but  under  socialism  they  would  have  no  more 
freedom  than  officeholders  now  enjoy,  in  the  United  States 
or  elsewhere.  Socialists  are  no  more  tolerant  of  opposi- 
tion, or  even  of  differences  of  opinion  within  their  own 
ranks,  than  other  people,  as  the  hvely  proceedings  of  their 
national  and  international  conferences  testify;  and  it 
would  probably  go  hard  with  the  luckless  officeholder 
who  should  undertake  serious  criticism  of  the  poHcy  of 
an  administration  composed  of  enthusiastic  advocates  of 
a  cooperative  commonwealth.     It  is  very  doubtful,   in- 


SOCIAUSM  365 

deed,  if  a  socialistic  government  would  furnish  the  print- 
ing presses,  paper,  postal  facilities,  and  public  halls  that 
would  be  needed  for  free  speech  and  open  discussion  hostile 
to  itself;  and  without  these  things,  it  would  be  impossible 
to  rally  an  opposition  party. 

§  235.  Few  people,  if  any,  would  care  to  assert  that 
existing  methods  of  production  are  perfect  or  that  the 
present  scheme  of  distribution  always  secures 

•*■  _  _  Conclusion. 

exact  justice.  But  this  much  can  be  affirmed : 
private  enterprise  has  been  able  to  increase  in  a  marked 
manner  the  production  of  wealth,  and  holds  out  a  pros- 
pect of  continued  improvement ;  the  present  distribution 
of  wealth  has  subserved  fairly  well  the  highest  interests  of 
our  civilization,  while  the  laborers,  who  make  up  the  most 
numerous  social  class,  have  been  able  to  im^prove  con- 
stantly their  position.  Moreover,  our  present  system 
secures  reasonable  opportunity  for  criticism  and  freedom 
for  experimentation,  so  that  it  is  possible  to  try  to  improve 
any  features  that  are  shown  to  be  unsatisfactory.  Rational 
criticism,  enlightened  public  opinion,  and  resolute  self- 
reliance  in  overcoming  economic  difficulties  seem  to  offer 
the  most  practicable  method  of  reforming  and  reshaping 
existing  institutions.  In  some  directions  reform  may 
best  be  secured  by  extending  the  activity  of  government; 
such  cases  can  be  dealt  with  as  they  arise.  But,  taking 
men  as  they  are,  and  not  as  we  would  like  to  have  them, 
it  will  probably  be  necessary,  for  an  indcfmite  time  to 
come,  to  appeal  to  the  motive  of  personal  gain  in  order 
to  secure  the  best  results  in  most  branches  of  productive 
industry.  Socialism,  in  fact,  would  probably  cut  the 
very  nerve  of  industrial  efficiency. 


$66  PROJECTS  FOR  ECONOMIC  REFORM 

FOR   SUPPLEMEiNTARY   STUDY 

The  Single  Tax :  George,  Progress  and  Poverty ;  Hadley,  Eco- 
nomics, 470-474;  Seager,  Introduction  to  Economics,  517- 
525;  Shearman,  Natural  Taxation;  Seligman,  Essays  in 
Taxation,  64-94. 

Socialism:  Bullock,  Selected  Readings  in  Economics,  668-705; 
Ely,  Socialism  and  Social  Reform ;  Ensor,  Modern  Socialism  ; 
Menger,  The  Right  to  the  Whole  Produce  of  Labor ;  Schaffle, 
Quintessence  of  Socialism;  Spargo,  Socialism;  Taussig, 
Principles  of  Economics,  II.  443-478;  Vandervelde,  CoUec 
tivism. 

QUESTIONS 

1.  What   marked   points   of   difference   do   you   see   between 
socialism  and  the  single  tax? 

2.  What  advantages  have  come  from  private  ownership  of 
land  in  the  United  States? 

3.  What  economic  and  political  conditions  are  favorable  to 
the  growth  of  socialistic  ideas  ? 

4.  What   prophecy  of   the   socialists  has   been   found   to  be 
untrue  ? 

5.  What  seem  to  you  to  be  the  strongest  and  the  weakest 
points  in  the  theories  of  the  socialists  ? 


:  rev- 
enue. 


CHAPTER  XV 

GOVERNMENTAL    REVENUES 

I.  The  Various  Branches  of  Revenue 

§  236.  In  performing  their  various  functions  govern- 
ments have  need  of  ample  revenues,  which  must  be  dravi^n 
from  the  incomes  of  their  citizens.  Apart  Pubiici 
from  loans,  which  are  but  a  temporary  form 
of  income,  five  main  branches  of  pubHc  revenue  may  be 
enumerated. 

§  237.  The  first  class  comprises  revenues  drawn  from 
domains  and  pubhc  industries.  Domains  are  lands 
owned  by  the  government,  and  are  often  of  (,)  From  do 
considerable  financial  importance  in  European  ™^'°^- 
states.  The  United  States,  however,  which  has  had  a 
magnificent  western  domain,  has  followed  a  different 
policy.  Believing  that  the  resources  of  the  country  would 
be  developed  most  rapidly  by  allowing  the  public  lands 
to  pass  into  private  ownership,  the  federal  government 
has  disposed  of  its  holdings  as  fast  as  possible,  so  that 
to-day  receipts  from  land  sales  form  but  an  insignificant 
item  in  the  national  revenues. 

Governments  conduct  many  kinds  of  public  industries, 
such    as    waterworks,   gas   and    electric    lighting    plants, 
railways,   and   postal   and    telegraph   systems.  And  public 
Sometimes   these   enterprises   are  operated   at  >°<^"s^"<=s- 
a   loss,    as    is   the   case   with    the   postal    service   of   the 

367 


368  GOVERNMENTAL   REVENUES 

United  States,  in  which  in  ordinary  times  there  has 
usually  been  a  deficit  of  several  millions.  Not  in- 
frequently a  profit  is  derived  from  public  industries; 
Prussia,  for  instance,  draws  a  large  net  revenue  from  her 
railroads,  while  England,  France,  and  Germany  realize 
substantial  sums  from  the  post  office.  In  general,  how- 
ever, financial  considerations  are  not  the  chief  reason  for 
bringing  these  enterprises  under  pubhc  management. 
The  purpose  has  been  rather  to  avoid  the  evils  of  monop- 
oly, to  extend  the  service  more  widely  than  private  com- 
panies could  do,  or  to  husband  natural  resources  such  as 
forests. 

§  238.   Fees  constitute  a  second  form  of  pubhc  revenue. 
They  are  charges  which  governments  make  for  services 

performed  mainly  in  the  public  interest  but 
(2)  Fromfees.    ^  .  Z  ,  ,     ,  r 

conierrmg  a  distmct,  measurable  benefit  upon 

the  payer.  Probate  fees,  court  charges,  fees  for  recording 
mortgages  and  deeds,  and  for  marriage  licenses  are  com- 
mon examples  of  this  sort  of  revenue. 

§  239.   A  third  branch  of  revenue  comprises  receipts  of 

a  very  miscellaneous  character.     Fines  and  penalties  form 

a  small  item  of  income.     Sometimes  property 

(3^  From  mis-  '■       '■         •' 

ceiianeous  revcrts  to  the  government  upon  the  failure  of 
heirs.  In  a  number  of  countries  pubhc  lotteries 
are  still  maintained,  and  yield  considerable  income. 
Finally,  governments  are  occasionally  the  recipients  of 
gifts,  which,  however,  are  usually  for  some  specific  purpose, 
as  a  park,  a  library,  or  a  schoolhouse,  and  do  not  form  a 
part  of  the  general  public  revenues. 

§  240.   A  fourth  form  of  revenue  has  become  very  im- 
portant in  the  finances  of  American  municipahties,  but 


THE   VARIOUS  BRANCHES   OF  REVENUE         369 

has  been  less  often  utilized  in  other  countries.  This  is  the 
special  assessment,  which  may  be  defined  as  "a  compul- 
sory contribution,  levied  in  proportion  to  the 

•'  _  .  I        r  (^j  •?\om  spe- 

special  benefits  derived,  to  defray  the  cost  of  a  ciai  assess 

•  r-  '        1  1         •       ments. 

specific  improvement  to  property,  undertaken  in 
the  public  interest."  When  new  streets  are  opened  or  old 
ones  are  paved,  when  drains  and  sewers  are  constructed 
or  when  pubUc  squares  or  parks  are  laid  out,  the  owners 
of  adjoining  real  estate,  which  is  enhanced  in  value  as  a 
result  of  such  improvements,  may  justly  be  called  upon  to 
pay  a  part  or  even  the  whole  of  the  cost  of  such  pubhc 
works.  The  entire  community  may  be  interested  in  such 
improvements;  and,  accordingly,  it  commonly  defrays  a 
part  of  the  expense  out  of  its  general  revenues.  But  the 
owners  of  abutting  real  estate  derive  a  special,  measurable 
benefit  from  such  pubhc  works,  and  should  in  justice 
bear  a  part  of  the  burden  thus  incurred.  Special  assess- 
ments have  become  an  important  and  probably  a  per 
manent  feature  of  American  municipal  finance,  since  they 
have  proved  well  adapted  to  the  needs  of  young  and  rapidly 
growing  cities. 

§  241.  Taxes  constitute  the  final,  and  under  modern 
conditions  the  most  important,  branch  of  public  revenue. 
They  may  be  defined  as  compulsory  contribu-  (5)  prom 
tions  exacted  by  governments  from  persons  **"®' 
within  their  jurisdiction  for  the  purpose  of  defraying 
general  public  expenses.  They  differ  from  fees  or  special 
assessments  in  that  they  are  not  charges  for  special, 
measurable  advantages  or  services  which  the  payer  has 
received  from  the  government.  The  actions  of  the  govern- 
ment in  protecting  persons  and  property,  or  in  ministering 


370  GOVERNMENTAL  REVENUES 

to  the  general  welfare  in  other  ways,  do  not  confer  upon 
particular  citizens  distinct  and  measurable  benefits;  they 
are  of  the  highest  importance  to  all,  but  they  bestow  com- 
mon benefits  upon  the  whole  body  of  citizens,  so  that  it  is 
impossible  to  estimate  the  precise  advantages  that  accrue 
to  individuals.  For  this  reason  all  persons  within  the  juris- 
diction of  the  government  may  be  called  upon  to  contribute 
to  its  support,  and  taxes  are  properly  defined  as  compulsory 
contributions  designed  to  meet  the  general  public  expenses. 
§  242.  If  taxes  are  honestly  and  wisely  expended,  the 
people  receive  a  large  return  for  the  sums  contributed  for  the 
support  of  the  government.  But  it  should  always 

The  "magic  ^^  °  i     i        •        r 

fund"de-  be  remembered  that  a  tax  is  a  deduction  from 
the  wealth  of  the  community  and  a  burden  upon 
the  taxpayers.  In  a  New  England  town  meeting  the  truth 
of  this  statement  is  keenly  realized  whenever  pubhc  ex- 
penditures are  authorized.  But  when  the  operations  of 
government  are  farther  removed  from  the  scrutiny  of  the 
people,  and  revenues  are  raised  by  customs  and  excise 
duties  which  are  concealed  in  the  prices  of  commodities, 
or  by  corporation  and  inheritance  taxes  which  are  less 
felt  by  the  mass  of  the  citizens,  there  is  danger  that  this 
fact  may  be  overlooked.  From  1885  to  1890  the  federal 
government  annually  collected  surplus  revenue  that 
amounted  to  even  more  than  $100,000,000,  and  the  evils 
of  such  a  condition  were  not  clearly  recognized  by  the 
people.  The  thoughtful  student  hardly  needs  to  be  told 
that  taxation  can  furnish  the  government  with  no  "magic 
fund,"  out  of  which  lavish  expenditures  can  be  made 
without  cost  to  anybody.  Yet  it  sometimes  appears  that 
this  delusion  is  more   commonly  entertained  than  it  is 


THE  VARIOUS  BRANCHES  OF  REVEAriTE        37 1 

pleasant  to  contemplate.  The  only  result  of  popular 
error  upon  this  point  must  be  extravagance  and  corrup- 
tion in  the  management  of  public  expenditures. 

§  243.   The  just  distribution  of  the  burden  of  taxation 
is  a  topic  that  occupies  much  space  in  treatises  upon  public 
finance,  but  it  cannot  be  said  that  anything  j^gt^jg^ri- 
like  a  final  conclusion  has  been  reached  upon   tution  of 

taxes. 

the  subject.  Adam  Smith's  famous  maxim  that 
the  "  subjects  of  every  state  ought  to  contribute  toward 
the  support  of  the  government  as  nearly  as  possible  in 
proportion  to  their  respective  abilities  "  has  gained  wide 
acceptance;  but  it  has  not  been  so  easy  to  agree  as  to 
what  constitutes  ability,  and  how  it  shall  be  measured. 
The  general  theoretical  problems  involved  in  the  question 
could  not,  in  any  case,  receive  adequate  treatment  in  the 
space  at  our  command,  and  must  of  necessity  be  set  aside. 
Something  may  be  said,  however,  concerning  the  various 
things  which  have  been  proposed  as  tests  or  criteria  of  the 
taxpayer's  ability  to  bear  public  burdens. 

Consumption  or  personal  expenditure  is  the  poorest  of 
all  measures  of  ability,  since  persons  with  large  incomes 
do  not  consume  proportionately  more  than  those  ^^^^^^ 
of  moderate  or  small  means;  while  people  who  measures  of 

.,  ability. 

must  support  large  families  necessarily  expend 
more  than  persons  of  the  same  income  who  are  differently 
situated.  Taxation  of  articles  of  common  consumption 
is,  therefore,  a  method  of  taxing  people's  necessities 
rather  than  their  ability.  A  second  criterion  has  been 
found  in  the  j)r()perty  which  each  person  owns.  This  is 
certainly  preferable  to  expenditure,  but  is  very  far  from 
perfect.     .\11    property    is    not    equally    productive;     and 


372  GOVERNMENTAL  REVENUES 

some  may  be  either  wholly  unproductive  or  a  positive 
burden  upon  the  owner,  who  may,  for  instance,  be  "land 
poor."  Then,  too,  many  persons  who  have  accumulated 
but  little  property  receive  wages  or  salaries  for  their  labor, 
and  are  able  to  contribute  something  to  the  support  of  the 
government  even  though  they  are  not  property  holders. 
Finally,  income  has  been  considered  the  true  measure  of 
abihty,  and,  without  doubt,  it  is  superior  to  either  of  the 
other  criteria.  But  income  is  not  an  unexceptionable 
measure,  since  it  is  not  always  a  perfect  test  of  ability.  In 
the  first  place,  an  income  derived  wholly  from  personal 
exertions  does  not  indicate  the  same  abihty  that  an  equal 
revenue  drawn  from  invested  property  represents.  The 
former  terminates  the  moment  that  the  power  to  labor 
ceases,  so  that  a  considerable  part  of  it  must  be  saved  in 
order  to  provide  for  the  future;  while  the  recipient  of  the 
latter  may  spend  his  entire  income  without  depriving  him- 
self of  the  means  of  future  support.  And,  in  the  second 
place,  ability  to  bear  public  burdens  varies  with  the  de- 
mands made  upon  each  person's  resources.  Two  incomes, 
for  instance,  may  be  equal;  but  the  recipient  of  one  may 
be  a  single  man,  while  the  recipient  of  the  other  has  an 
expensive  family  to  support.  In  such  a  case  it  is  evident 
that  equal  incomes  do  not  indicate  equal  abihty  to  con- 
tribute to  the  government. 

Yet  even  though  no  perfect  measure  of  ability  is  attain- 
able, it  is  not  impossible  to  secure  approximate  justice  in 
The  practical  apportioning  the  burden  of  taxation.  Income 
outcome.  j^^y  ^^  made  the  chief  test  of  the  taxpayer's 
ability,  and  something  can  be  done  to  correct  the  inequal- 
ities that  result  in  certain  cases  from  the  adoption  of  such 


THE   VARIOUS  BRANCHES  OF  REVENUE         373 

a  standard.  Funded  incomes,  for  instance,  can  be  taxed 
more  heavily  than  those  derived  from  personal  exertions 
—  a  thing  that  can  be  accomplished  by  levying  taxes  upon 
property  as  well  as  upon  income.  Furthermore  a  certain 
minimum  sum  may  be  exempted  from  the  operation  of 
taxes  that  are  levied  directly  upon  revenue,  and  a  rough 
allowance  can  in  this  way  be  made  for  the  demands  which 
the  maintenance  of  a  family  makes  upon  the  possessors  of 
small  incomes. 

§  244.  Associated  with  the  problem  of  justice  in  taxation 
is  the  question  whether  the  tax  rate  should  be  proportional 
or  progressive.  A  tax  is  proportional  when  it  proportional, 
imposes  a  fixed  rate,  say  two  per  cent  of  the  an^'^progres- 
value  of  all  objects  assessed,  irrespective  of  sive  taxation, 
the  total  amount  of  the  property  or  income  of  each,  tax- 
payer. Taxes  are  legressive  when  the  rate  increases  as 
the  amount  of  property  or  income  decreases.  Thus  a 
fixed  business  license  tax  of  $20  upon  all  retail  store- 
keepers would  be  regressive,  since  the  rate  of  taxation 
would  increase  as  the  size  of  the  business  decreased. 
Finally,  taxes  are  progressive  when  the  rate  increases  as 
the  taxable  property  or  income  increases.  Thus  a  progres- 
sive income  tax  may  impose  a  rate  of  one  per  cent  upon 
incomes  of  $1000  or  less,  and  may  levy  higher  rates  upon 
larger  incomes. 

The  injustice  of  a  regressive  tax  must  be  evident  to  all, 
but  there  is  a  difference  of  opinion  concerning  the  merits 
of  proportional  and  progressive  taxation.  The  Merits  of  the 
opponents  of  a  progressive  rate  denounce  it  '°^^'*°**^- 
loudly  as  a  measure  of  confiscation ;  but  it  seems  probable 
that  a  progressive  tax,  if  it  can  be  rigidly  collected  fron? 


374  GOVERNMENTAL  REVENUES 

the  larger  incomes,  corresponds  more  nearly  than  a  pro- 
portional tax  to  the  demands  of  justice.  This  is  because, 
as  income  increases,  ability  to  bear  public  burdens  prob- 
ably increases,  at  even  a  more  rapid  rate.  A  tax  of  two 
per  cent  may  mean  the  sacrifice  of  articles  of  decency  and 
necessity  for  a  man  who  must  support  a  family  out  of  an 
income  of  $500,  while  a  man  who  enjoys  an  income  of 
$10,000  will  feel  but  slightly  the  payment  of  a  tax  of  the 
same  rate.  More  than  this,  the  possession  of  a  large 
income  gives  a  person  a  great  advantage  in  the  acquisition 
of  future  riches,  because  it  is  the  first  thousand  dollars  of 
a  fortune  that  is  hardest  to  acquire,  since  wealth  begets 
wealth.  Such  considerations  seem  to  justify  a  moderate 
increase  of  the  rate  of  taxation  as  fast  as  the  property  or 
income  increases.  But  this  is  true  only  upon  the  condi- 
tion that  the  tax  is  well  administered  and  rigidly  collected. 
Great  practical  difficulties  are  encountered  at  precisely 
this  point.  In  this  country  proportional  taxes  upon 
property  or  income  are  poorly  enforced,  and  fall  with 
undue  weight  upon  persons  of  small  or  moderate  means. 
Until  we  have  administrative  machinery  that  will  enable 
us  to  reach  large  fortunes  with  certainty,  progressive 
taxation  would  probably  serve  only  to  increase  the  in- 
equalities that  inhere  in  our  existing  tax  systems.^ 

II.   Federal  Taxation  in  the  United  States 

§  245.  The  federal  government  has  always  derived  a 
very  large  part  of  its  revenue  from  customs  duties  imposed 

1  In  the  case  of  inheritance  taxes  it  may  be  possible  to  enforce  with 
reasonable  certainty  a  progressive  rate,  since  we  have,  as  will  be  explained 
Uter,  fairly  satisfactory  methods  of  reaching  the  larger  estates. 


FEDERAL  TAXAT/OiV  IN  THE  UNITED  STATES     375 

upon  commodities  imported  into  the  United  States. 
These  taxes  are  practically  reserved  for  its  exclusive  use  by 
that  clause  of  the  Constitution  which  forbids  customs 
any  state  to  "lay  any  imposts  or  duties  on  '^"^*^^- 
imports  or  exports."  They  had,  in  fact,  prior  to  the 
Civil  War,  furnished  nearly  the  whole  of  the  national 
revenues  in  times  of  peace;  in  i860,  wnth  a  total  income 
of  $56,054,000,  the  customs  amounted  to  $53,187,000. 
Since  that  period  other  taxes  hare  been  required  in  order 
to  meet  the  heavy  charges  occasioned  by  the  war  and  the 
more  lavish  scale  of  general  expenditure;  but  in  1914 
out  of  a  total  revenue  of  $734,673,000,  the  customs 
brought  in  8292,320,000. 

Import  duties  may  be  either  specific  or  ad  valorem 
(§  162).  The  latter  are  open  to  the  objection  that  they 
lead  to  the  undervaluation  of  imrjorts  and  so 

'  Specific  and 

facilitate  frauds  in  the  collection  of  revenues,   aa  valorem 
Specific  duties  are  easier    to  administer  and 
more  difficult  to    evade,  but  are  not  free  from   serious 
objections.     Goods  of  the  same  general  character  often 
differ  widely  in  value,  and  a  simple  specific  duty  falls  with 
undue  weight  upon  the  cheaper  grades. 

If  customs  taxes  arc  to  yield  a  large  revenue,  they  must 
be  imposed  upon  articles  of  general  consumption ;  and 
the  bulk  of  our  receipts  has  always  come  from  „ 

'         ^  •'  Customs 

a  few  commodities  of  this  kind.     In  191 1,  for  duties  are 

11  J     regressive. 

instance,  not  less  than  $52,687,000  was  collected 
from  sugar  and  molasses.    This  was  practically  a  per  capita 
tax  of  nearly  sixty  cents  for  every  man,   woman,  and 
child  in  the  United  States,  since  the  consumption  of  sugar 
is  almost  universal;    and  it  amounted  to  not  less  than 


376  GOVERNMENTAL  REVENUES 

$3  for  every  family  of  five  persons/  Sugar  is  an 
extreme  case;  but,  in  general,  the  consumption  of  the 
goods  that  yield  most  of  the  revenue  is  not  at  all  propor- 
tionate to  the  taxpayer's  income,  so  that  a  customs  tariff 
is  necessarily  a  form  of  regressive  taxation.  Moreover, 
in  so  far  as  duties  levied  for  the  purpose  of  protection  tend 
to  increase  the  prices  of  domestic  commodities,  they  take 
out  of  the  consumer's  pocket  much  more  than  the  govern- 
ment receives.^ 

§  246.  Excise  duties  are  levied  upon  commodities  of 
domestic  production.  Except  for  a  few  years  after  the 
Excise  adoption  of  the  present    Constitution,  and  in 

duties.  |.]^g  ^2X  of  181 2,  they  were  not  used  by  our 

federal  government  prior  to  the  Civil  War.  Moreover, 
the  freedom  of  commercial  intercourse  between  the  states 
was  such  that  no  commonwealth  could  levy  an  excise 
without  injuring  or  destroying  the  industry  upon  which  it 
might  fall.  But  in  1862  and  1864  Congress  was  obHged 
to  establish  a  formidable  system  of  excise  taxes  upon 
almost   all   conceivable   articles,   by  which,   in   1866,   an 

^  Duties  on  wool  and  woolen  goods,  cotton  fabrics,  vegetable  fibers  and 
their  products,  and  iron  or  steel  goods,  brought  in  $95,763,000.  These 
goods  are  widely  used,  though  the  imported  products  are  not  in  such  uni- 
versal use  as  sugar.  Such  articles  as  imported  liquors,  silks,  and  jewelry, 
the  luxuries  of  the  rich  or  well-to-do,  yielded  only  $38,685,000.  Tobacco, 
w'dely  though  not  universally  used,  yielded  $26,159,000. 

2  In  1903,  for  instance,  the  United  States  collected  $16,865,000  from 
imported  iron  and  steel,  but  the  steel  trust  taxed  the  country  several  times 
this  amount.  In  that  year,  to  take  the  clearest  illustration,  the  imports  of 
steel  rails  were  122,444  tons,  upon  which,  the  duty  being  $7.84,  the  United 
States  collected  less  than  a  million  dollars.  But  upon  the  2,924,956 
tons  of  rails  made  and  consumed  at  home,  our  people  paid  a  tribute  of 
$7  or  $8  a  ton  to  the  steel  rail  pool  v^"'-''  added  about  the  amount  of  the 
duty  to  the  price  charged  domestic  consume^,. 


FEDERAL  TAXATIOX  IN  THE  UNITED  STATES      377 

internal  revenue  of  not  less  than  $i9o,ooo,cxx)  was 
obtained.  After  the  war  taxation  was  reduced,  and 
most  of  the  excise  duties  were  repealed;  but  the  ex- 
penditures remained  so  much  larger  than  they  had  been 
in  i860  that  the  taxes  on  spirits,  beer,  and  tobacco  had 
to  be  retained,  and  they  have  now  become  a  permanent 
part  of  our  revenue  system.  In  1913  the  internal  revenue 
receipts  aggregated  $344,416,000.^ 

Our  commodity  taxes  are  collected  by  means  of  stamps 
which  must  be  affixed  to  all  packages  containing  the 
dutiable  articles,  in  such  a  manner  that  the  Machinery 
stamps  will  be  destroyed  when  the  gpods  are  »*  coUection. 
opened  for  consumption.  In  addition,  producers  of  these 
articles  are  subject  to  a  certain  amount  of  supervision. 
The  ser\ice  is  now  efficient,  and  there  is  not  much  evasion 
except  in  mountainous  districts  of  the  South  and  certain 
large  cities,  in  which  spirits  are  sometimes  illegally  dis- 
tilled with  the  comparatively  simple  and  inexpensive  ap- 
paratus that  can  be  employed.  For  a  good  many  years, 
however,  after  the  tax  on  spirits  was  introduced  in  1862, 
there  was  a  large  amount  of  evasion,  and  at  one  time 
corruption  within  the  internal-revenue  service  assumed 
such  proportions  as  to  cause  a  national  scandal. 

During  the  late  warwith  Spain  the  rates  imposed  on  beer 
and  tobacco  were  largely  increased  and  some  ad-  (,Q^j.,ygjQ„g 
ditional  articles  were  taxed,  but  these  duties  concerning 

.         excise  taxes. 

have  since  been  repealed.    The  taxes  now  levied 

upon  liquors  and  tobacco  supi)ly  a  large  revenue  in  time  of 

'  The  income  tax  of  191.^  increased  the  internal  revenue  receipts 
after  that  year;  in  1916  they  amounted  to  Ssi2, 702,000.  In  1918  the 
war  income,  excess  profits,  and  other  war  taxes  brought  the  internal 
revenue  up  to  the  gigantic  figure  of  $3,696,000,000. 


378  GOVERNMENTAL  REVENUES 

peace  and  a  few  other  articles  can  furnish  a  considerable 
additional  income  if  it  should  ever  be  needed.  Like  cus- 
toms duties,  they  are  regressive,  and,  therefore,  unjust  un- 
less other  taxes  are  laid  upon  wealth  or  income  in  order  to 
compensate  for  the  inequality  of  the  excise  system.  Yet 
neither  our  own  nor  any  other  country  can  dispense  with 
the  large  sums  now  derived  from  taxes  on  consumption; 
and  the  chief  thing  that  commends  excise  duties,  Hke  cus- 
toms, to  general  favor  is  that  they  enable  a  government  to 
pluck  the  largest  amount  of  feathers  with  the  smallest 
amount  of  squealing. 

This  ease  of  collection  is  due  to  the  fact  that  such  taxes 
are  concealed  in  the  prices  which  citizens  pay  for  commod- 
Easeof  ities,  and  are  collected  in  small  amounts  upon 

coiiectioD.  ^  i^^gg  number  of  purchases.  The  collection 
of  poll,  property,  or  income  taxes  requires  the  presenta- 
tion of  a  formal  demand  for  a  considerable  sum  of  money, 
which  the  payer  cannot  always  spare  without  more  or  less 
inconvenience.  It  is  easier  for  the  average  person  to  pay, 
a  few  cents  at  a  time,  a  larger  tax  that  is  collected  by  cus- 
toms or  excise,  than  to  meet  a  direct  demand  for  the  pay- 
ment of  other  taxes.  At  the  same  time,  however,  account 
must  be  taken  of  the  further  fact  that  the  so-called  in- 
direct taxes,  like  customs  or  excise,  for  the  very  reason 
that  they  are  less  felt,  lead  the  people  to  display  less  interest 
in  the  expenditure  of  the  public  money.  This  has  caused 
a  vast  amount  of  extravagance  in  our  national  expenditures, 
and  will  continue  to  do  so.  Good  citizenship,  which  im- 
plies a  keen  interest  in  all  the  details  of  public  affairs, 
seems  to  be  promoted  more  effectually  by  a  system  that 
places  at  least  a  part  of  the  burden  of  taxation  directljf 


FEDERAL  TAXATION  hV  THE  UNI  TED  STATES    379 

upon  the  shoulders  of  the  taxpayer,  instead  of  concealing 
it  in  the  prices  that  he  pays  for  articles  of  common  con- 
sumption. 

§  247.  The  Civil  War  led  to  the  establishment  of  many 
duties  upon  business  or  legal  transactions  in  which 
written  instruments  were  employed ;  and  again  Taxes  on 
in  1898  stamp  taxes  were  levied  upon  bills  of  t'"*°s*<=^i°°s 
exchange,  transfers  of  stocks  and  bonds,  bills  of  lading, 
bank  checks,  telegraph  messages,  express  receipts,  and 
some  other  objects.  In  other  countries  transaction  taxes 
form  a  part  of  the  permanent  revenue  system;  but,  with 
us,  they  have  been  reserved  for  employment  in  special 
emergencies.  If  additional  income  must  be  had,  the  use 
of  such  a  resource  is  legitimate ;  but,  on  purely  economic 
grounds,  the  taxation  of  transactions  is  not  to  be  com- 
mended. It  is  next  to  impossible  to  graduate  these  taxes 
according  to  the  amount  of  the  transaction,  except  in  a 
few  cases ;  so  that  the  burden  cannot  be  equitably  distrib- 
uted. Then,  too,  they  have  the  effect  of  interfering  with 
the  normal  course  of  business,  since  they  oblige  taxpayers 
to  avoid  so  far  as  practicable  the  transactions  upon  which 
duties  are  laid.  During  the  recent  war  transaction 
taxes  were  again  introduced,  and  in  1918  they  yielded 
$18,815,000. 

§  248.    burinj^  the  Civil  War  Congress  was  obliged  to 
establish  an  income  tax,  which,  in  1866,  yielded  the  sum 
of  $72,982,000.     Up  to  thai  lime  this  form  of  Taxation  of 
taxation  had  been  used  by  a  few  states  without  '"'^o'"^^ 
much  success,'  but  had  never  been  tried  by  the  national 

>  Wisconsin  establi>h(d  a  stale  income  tax  in  1911,  which  went  into 
very  successful  operation  in  1912,  yielding  about  §3,500,000. 


38o  GOVERNMENTAL  REVENUES 

governmeni.  The  federal  tax  was  discontinued  in  1872, 
and  thereafter  taxation  of  incomes  was  practically  unknown 
in  the  United  States.  In  1894,  in  order  to  obtain  addi- 
tional revenue  and  equalize  the  burden  of  taxation,  Con- 
gress established  another  tax  upon  incomes,  exempting 
all  of  less  than  $4000;  but  before  it  could  go  into  opera- 
tion, this  law  was  pronounced  unconstitutional  by  the 
Supreme  Court. 

The  federal  Constitution  requires  that  representatives 

•and    direct     taxes    shall    be    apportioned     among    the 

several   states  "according  to  their  respective 

Amendment  i      •  i     i      i      ^     ^i 

of  the  numbers,'  and    the  Court   decided  that    the 

income  tax  was  a  direct  tax  and  therefore  could 
be  levied  only  by  apportionment  according  to  the  rule 
the  Constitution  prescribed.  Congress  had  attempted 
to  levy  an  apportioned  direct  tax  only  three  times,  the 
last  one  being  levied  in  1861,  and  it  was  evident  in  1895 
that  the  various  states  differed  so  widely  in  respect  to 
wealth  that  Congress  would  never  again  apportion  a 
tax  according  to  population.  Therefore  the  decision  of 
the  Supreme  Court  that  an  income  tax  was  a  direct  tax 
made  it  apparent  that,  if  the  taxing  power  of  the  federal 
government  was  not  to  be  seriously  and  even  dangerously 
limited,  the  Constitution  of  the  United  States  would  have 
to  be  amended.  An  amendment  conferring  upon  Con- 
gress power  to  levy  an  income  tax,  without  apportioning 
it  according  to  population,  was  finally  adopted  by  Con- 
gress in  1909,  and  ratified  by  the  necessary  number  of 
states  early  in  1913.  Acting  under  the  authority  thus 
granted,  Congress  proceeded  immediately  to  frame  a 
law  imposing  a   tax  upon  incomes.     This  Act  of   1913 


FEDERAL  TAXATION  IN  THE  UNITED  STATES      381 

imposed  an  ordinary  tax  of  one  per  cent  upon  all  incomes 
in  excess  of  $3000  (or  $4000  in  the  case  of  a  married 
couple),  and  also  a  graduated  surtax,  or  additional  tax, 
ranging  from  one  to  six  per  cent,  on  incomes  in  excess 
of  $20,000,  the  highest  rate  applying  to  the  excess  of 
incomes  above  $500,000.  In  the  case  of  corporations, 
the  ordinary  tax  was  collected  from  the  corporations 
themselves  and  stockholders  were  exempted  from  it. 
This  tax  yielded  $60,710,000  in  1914.  In  1916,  on 
account  of  the  reduction  of  the  yield  of  customs  duties 
as  a  result  of  the  European  war,  the  rate  of  the  normal 
tax  was  increased  to  two  per  cent  and  the  rates  of  the 
surtax  were  fixed  at  from  one  to  thirteen  per  cent,  the 
highest  rate  applying  to  the  excess  of  incomes  above 
$2,000,000.  This  produced  about  $323,000,000  of  rev- 
enue in  191 7. 

In  order  to  pro\dde  additional  revenue  after  the  United 
States  entered  the  European  war,  the  income  tax  was 
recast  and  its  rates  were  greatly  increased  by  jhe  war 
the  War  Revenue  Act  of  191 7.  In  addition  to  '°'=°'°^  *"• 
the  existing  normal  income  tax  of  two  per  cent,  this 
act  levied  a  new  normal  tax  of  two  per  cent  upon  in- 
dividuals and  four  per  cent  upon  corporations.  It 
then  raised  the  rates  of  the  surtax  to  heights  never  be- 
fore reached  in  the  history  of  income  taxation,  by 
adding  to  the  existing  surtax,  the  rates  of  which  ranged 
from  one  to  thirteen  per  cent,  a  war  surtax  '  with  rates 
that  ranged  from  one  to  fifty  per  cent.  Thus  upon  that 
part  of  any  individual  income  that  exceeded  $2,000,000, 
there  was  levied  the  old  normal  rate  of  two  per  cent, 
'  The  new  surtax  a|)i)li(il  lo  iiuomi's  in  excess  of  $5000. 


382  GOVERNMENTAL  REVENUES 

the  new  normal  rate  of  two  per  cent,  the  old  normal 
surtax  of  thirteen  per  cent,  and  the  war  surtax  of  fifty 
per  cent,  —  the  total  rate  thus  imposed  amounting  to 
sixty-seven  per  cent.  Under  this  act  $663,183,000  of 
taxes  were  assessed  in  the  fiscal  year  of  1918.  Early  in 
1 91 9  the  income  tax  law  was  extensively  revised  by 
doing  away  with  the  cumbersome  double  system  of  old 
and  new  normal  taxes  and  old  and  new  surtaxes,  and 
substituting  therefor  a  single  set  of  normal  and  surtax 
rates.  Incomes  in  excess  of  $1000  (or  $2000  in  the  case 
of  a  married  couple)  are  taxable.  On  the  first  $4000  of 
taxable  income  above  the  exemption  the  rate  of  the 
normal  tax  is  six  per  cent,  and  upon  incomes  in  excess 
of  that  figure  it  is  twelve  per  -cent.  The  surtax  is  ap- 
plicable to  the  excess  of  incomes  above  $5000,  and  its 
rates  range  from  one  per  cent  on  the  first  $1000  of  taxable 
income  in  excess  of  $5000  up  to  sixty-five  per  cent  on 
the  excess  of  any  income  above  $1,000,000.  The  total 
tax  imposed,  therefore,  rises  to  a  maximum  rate  of 
77  per  cent  on  the  excess  of  any  income  above  the  figure 
just  stated.-  For  1920  the  rates  of  the  normal  tax  are 
to  be  two  thirds  of  those  levied  in  1919. 

The  financial  needs  of  the  war  led  to  the  establish- 
ment of  another  kind  of  income  tax  known  as  the  excess- 
The  excess-  profits  tax.  Since  the  large  expenditures  of 
profits  tax.  ^^  government  and  other  causes  produced  an 
unprecedented  demand  for  commodities  at  high  prices, 
profits  in  many  lines  of  business  were  very  large  and  far 
exceeded  the  rates  prevailing  in  ordinary  times.  The 
Act  of  191 7,  therefore,  levied  a  special  income  tax  de- 
signed to  reach  business  profits  in  excess  of  the  ordinary 


FEDERAL   TAXATION  IN  THE  UNITED  STATES    383 

rates,  hence  the  name  of  excess-profits  tax.  This  was 
accomphshed  by  enacting  that  all  profits  in  excess  of 
seven,  eight,  or  nine  per  cent  ^  of  the  invested  capital, 
received  by  all  individuals,  partnerships,  or  corpora- 
tions engaged  in  any  trade,  business,  profession,  or 
occupation,  should  be  subject  to  a  special  tax  levied  at 
rates  varying  from  twenty  to  sixty  per  cent,  according 
to  the  percentage  which  such  profits  bore  to  the  in- 
vested capital. 2  In  any  case  in  which  no  capital  or 
only  a  nominal  amount  of  capital  was  employed,  the 
rate  was  fixed  at  eight  per  cent.  Since  the  normal 
rate  of  profit  in  different  lines  of  business  varies  very 
greatly,  this  act  produced  a  great  deal  of  inequality. 
It  yielded,  however,  an  enormous  revenue  which  was 
urgently  needed,  and  proved  a  conspicuous  financial 
success.  In  1918  the  excess-profits  taxes  assessed^ 
amounted  to  $2,227,500,000. 

'  Whether  the  seven,  eight,  or  nine  per  cent  rates  should  apply 
depended  on  the  rate  of  profit  earned  during  the  pre-war  period,  that  is, 
the  3'ears  191 1,  191 2,  and  1913. 

-  Thus  in  case  the  profits  exceeded  the  normal  rate  (we  will  assume 
eight  per  cent  for  the  purpose  of  our  illustration),  but  did  not  exceed 
fifteen  per  cent  of  the  invested  capital,  the  rate  of  the  tax  was  twenty 
per  cent.  Any  excess  of  profits  above  fifteen  per  cent,  but  not  exceeding 
twenty  per  cent,  was  taxed  twenty-five  per  cent.  Any  excess  above 
twenty  per  cent,  but  not  exceeding  twenty-five  per  cent,  was  taxed 
thirty-five  per  cent ;  and  so  on  until  a  rate  of  sixty  per  cent  was  imposed 
upon  any  excess  of  profits  above  thirty-three  per  cent.  Provision  was 
made,  however,  that,  in  addition  to  the  seven,  eight,  or  nine  per  cent  of 
profits  wl#-h  were  exempt  from  the  tax,  individuals  and  partnerships 
should  be  entitled  to  a  further  exemption  of  S6000  of  profits  and  corpora- 
tic  ns  should  be  entitled  to  an  exemption  of  S.3000. 

'  The  taxes  collected  from  incomes  and  excess  profits  arc  not  sepa- 
rately stated  in  the  Treasury  Reports.  The  total  collections  were 
$2,838,999,000  in  igiS. 


384  GOVERNMENTAL  REVENUES 

Early  in  191 9,  in  order  to  provide  additional  revenue 
and  also  to  remedy  some  of  the  serious  inequalities  that 
The  excess-  had  developed,  the excess-profits  tax  was recast, 
recast  fn^  I^  was  made  applicable  only  to  corporations, 
^^^^  individuals  and  partnerships  being  exempted. 

The  method  of  levying  the  tax  on  profits  in  excess  of 
a  stated  percentage  of  the  invested  capital  was  re- 
tained, the  tax  being  made  applicable  to  profits  in 
excess  of  eight  per  cent.  But  in  addition  to  this  measure 
of  taxable  ability,  an  alternative  measure  is  provided 
in  the  form  of  a  war-profits  tax.  This  is  to  be  based 
upon  the  difference  between  the  average  net  income  for 
the  pre-war  period  and  the  net  income  for  the  taxable 
year,  and  its  rate  is  eighty  per  cent  of  the  amount  by 
which  the  latter  net  income  exceeds  the  former.  After 
computing  the  amount  of  the  excess-profits  and  the 
war-profits  taxes,  the  corporation  is  to  pay  whichever 
tax  is  the  greater.  The  war-profits  tax,  however,  is 
not  to  be  levied  after  191 9.  The  practical  effect  of 
the  new  law  is  that  corporations  which,  under  the 
excess-profits  method,  would  pay  only  a  small  or  moderate 
tax,  will  have  to  pay  the  heavy  war-profits  tax  if  their 
taxable  income  greatly  exceeds  the  average  income  of 
the  pre-war  period.  The  future  of  the  excess-profits 
tax  is  uncertain.  The  need  of  raising  a  large  revenue 
to  meet  the  heavy  interest  and  other  charges  left  by 
the  war  may  lead  to  its  continuance,  in  some  form, 
for  a  number  of  years ;  but  its  administrative  diffi- 
culties and  the  unequal  burden  it  imposes  upon  differ- 
ent industries  seem  to  make  it  an  undesirable  tax  for 
ordinary  times. 


STATE  AND  LOCAL   TAXAT/OA'  385 

III.   State  and  Local  Taxation  in  the  United  States 

§  249.  American  states,  counties,  cities,  and  towns 
have  long  derived  most  of  their  revenue  from  the  general 
property  tax,  which  is  supposed  to  be  levied  -pjje  general 
upon  all  the  property,  both  real  and  personal.  Property  tai. 
in  the  possession  of  the  taxpayers.  In  1902  the  total 
amount  of  the  state  and  local  receipts  was  $934,629,000 ; 
and  of  tills  sum,  taxes  on  property  yielded  about  seventy- 
five  per  cent. 

There  are  differences  in  the  methods  of  administering 
the  tax,  but  the  laws  of  various  states  require  the  as- 
sessors to  make  an  exhaustive  enumeration    .^    .  .  , 

Admimstra- 

and  valuation  of  all  kinds  of  taxable  property,   tion  of  the 

tax. 

Generally,  too,  notably  in  the  case  of  personal 
property,  taxpayers  are  called  upon  to  make  detailed 
statements  of  their  possessions ;  and  often  this  nmst  be 
done  under  oath.  The  assessors  have  power  to  correct 
these  declarations  whenever  there  is  reason  to  suppose 
that  a  full  disclosure  has  not  been  made ;  while  the  tax- 
payer can  appeal  to  higher  officials,  or  eventually  to  the 
courts,  for  rectification  of  erroneous  assessments.  Prop- 
erty is  supposed  to  be  rated  at  its  full  value,  and  the  tax 
raised  for  state  purposes  is  levied  among  the  counties  or 
other  local  units  in  ])r()p()rti()n  to  the  respective  valuations 
of  their  taxable  proiJcrl)-.  'I'o  the  (juota  which  each  com- 
munity must  raise  for  state  puri)oses,  the  sums  needed 
for  local  use  are  added,  and  the  total  is  then  assessed 
upon  taxable  property  at  a  rate  which  will  bring  in  the 
amount  of  money  required. 

In  its  actual  operation  the  general  i)roperty  tax  causes 


386  GOVERNMENTAL  REVENUES 

great  inequality  in  the  distribution  of  the  tax  levied  for 
state  purposes.  Each  board  of  local  assessors  has  a 
Unjust  ap-  strong  inducement  to  undervalue  the  taxable 
of  the"prop^-  property  in  its  own  district,  because  by  such  a 
erty  tax.  course  the  amount  of  the  state  tax  apportioned 
to  the  locality  will  be  reduced.  The  result  is  that  prop- 
erty is  almost  never  rated  at  its  full  value ;  while  the 
assessed  valuation  may  be  only  ten  or  twenty  per  cent  of 
the  true  valuation  in  some  sections,  and  as  high  as  eighty 
or  ninety  per  cent  in  others.  It  follows  necessarily  that 
the  burden  of  state  taxation  is  distributed  most  unjustly 
among  the  various  local  units.  To  remedy  this  difficulty 
state  boards  of  equalization  have  been  formed,  and 
authorized  to  correct  these  inequalities  of  apportionment. 
But  this  could  be  done  only  by  an  actual  revaluation  of 
all  the  property  of  the  state  ;  and  the  boards  of  equaliza- 
tion, at  the  best,  can  merely  proceed  by  rough  guess- 
work. Recently  permanent  tax  commissions  have  been 
established  in  some  states,  and  have  been  given  super- 
visory powers  over  local  assessors,  by  which  they  have 
secured  a  fairer  distribution  of  state  taxes. 

A  second  cause  of  the  grossest  injustice  is  the  failure 
of  this  tax  to  reach  personal  property.  A  large  part  of 
Its  failure  the  wealth  of  a  modern  community  consists 
p*erso^n^  o^  corporation  stocks  and  bonds,  mortgages, 
property.  notcs,  book  accouuts,  and  other  forms  of 
intangible  personalty  that  easily  escape  the  sharpest 
investigation  of  the  assessors.  Moreover,  these  officials 
are  usually  elected  by  the  votes  of  the  men  whom  they 
have  to  assess,  and  they  are  not  inclined  to  adopt  very 
vigorous  means  of  discovering  the  less  tangible  property 


STATE  AMD  LOCAL   TAXATION  387 

of  the  voters.  Most  of  the  personal  property  that  is 
actually  reached  consists  of  stock  in  trade,  machinery, 
and  hve  stock  "or  other  farm  capital.  In  1896  nearly 
two  thirds  of  the  personalty  taxed  in  Massachusetts 
consisted  of  tangible  goods  of  this  character.  In  1850  the 
total  assessed  valuation  of  personal  property  in  all  the 
states  was  $2,125,000,000,  while  real  estate  was  valued 
at  $3,899,000,000.  In  1902  the  personalty  was  assessed 
at  only  $8,923,000,000,  while  realty  was  assessed  at 
$26,415,000,000.  It  will  be  noticed  that  in  52  years 
the  assessed  valuation  of  personal  property  had  increased 
by  only  $6,798,000,000 ;  while  that  of  real  property  in- 
creased by  $22,516,000,000.  Now  it  is  a  well-known 
fact  that  during  this  period  there  has  been  a  very  great 
increase  of  personal  property,  especially  in  its  less  tangible 
forms.  Yet  its  assessed  valuation  now  forms  a  smaller 
proportion  of  the  total  property  taxed  than  was  the  case 
in  1850.  In  the  state  of  New  York  the  proportion  of 
personal  property  has  constantly  decreased,  until  nine 
tenths  of  the  burden  of  taxation  falls  upon  real  estate ; 
while  in  the  city  of  Brooklyn,  in  1895,  personal  property 
bore  less  than  two  per  cent  of  the  total  tax.  In  New  York 
the  richest  men  in  the  country  are  assessed  for  only  a  few 
hundred  thousand  dollars  of  personal  property,  when 
their  known  investments  in  corporate  securities  yield  an- 
nual incomes  that  amount  to  millions.  It  may  be  stated 
as  a  general  principle,  therefore,  that  the  taxation  of 
personal  property  "is  in  inverse  ratio  to  its  quantity"; 
and  that  "the  more  it  increases,  the  less  it  jxiys."  An 
inevitable  result  of  this  is  that  state  taxation  falls  with 
undue  weight  upon  the  country  districts,  where  there 


388  GOVERNMENTAL   REVENUES 

is  little  intangible  wealth,  and  personal  property  exists 
in  the  form  of  household  goods,  live  stock,  and  farm 
implements,  none  of  which  can  hope  to  escape  the 
assessor. 

One  other  abuse  arising  from  the  present  property 
taxes  must  not  be  overlooked.  While  all  real  estate  can 
Unjust  easily  be  found  by  the  assessor,  the  valuations 

of  rea\*°"^  of  different  properties  are  often  most  unequal, 
estate.  ^^  j^^^g  been  seen,  undervaluation  is  the  general 

rule ;  and  it  is  probable  that,  throughout  the  country, 
the  assessment  of  real  property  does  not  exceed  one  half 
of  its  actual  value.  The  systematic  undervaluations 
that  prevail  open  the  door  to  gross  abuses  in  some  of  our 
large  cities,  where  the  most  valuable  lots  and  buildings 
are  sometimes  assessed  much  more  lightly  than  smaller 
properties.  Thus  in  Chicago,  a  few  years  ago,  it  was 
found  that  seventy  of  the  choicest  pieces  of  real  estate 
were  assessed  at  less  than  nine  per  cent  of  their  true  value ; 
while  eighty  small  estates,  worth  $4000  and  less,  were 
assessed  at  almost  sixteen  per  cent  of  the  actual  selling 
price. 

But  we  cannot  stop  even  here  in  our  statement  of  the 

evils  that  attend  the  present  administration  of  theproperty 

tax.     Existing  laws  offer  to  taxpayers  terrible 

Demorahza-    . 

tion  caused    inducements  to  commit  frauds.     When  each 

by  the  tax.         ...  ,      , 

Citizen  IS  compelled  to  declare  under  oath 
the  full  value  of  his  property,  perjury  is  the  usual  result ; 
for  an  honest  man,  who  desires  to  pay  all  that  is  justly 
due  from  him,  knows  that,  if  he  tells  the  whole  truth,  he 
will  have  to  bear  two  or  three  times  his  fair  burden.  Thus 
our  present  system  punishes  honesty  with  a  double  load 


STATE  AND  LOCAL   TAXATION  389 

of  taxes,  and  allows  the  dishonest  and  unscrupulous  tax 
dodger  to  escape. 

Our  general  property  tax  has  been  shown  to  be  largely 
a  tax  upon  real  estate,  since  most  personal  property, 
except  that  of  a  tangible  form,  escapes  the  conclusions 
assessors.  In  its  apportionment  there  are  the*prTpefty 
the  grossest  inequalities  between  different  *"• 
towns  and  counties,  while  between  individual  citizens 
its  burdens  are  often  distributed  without  the  remotest 
approach  to  justice.  More  than  this,  it  has  become  a 
fruitful  source  of  demoralization,  and  is  systematically 
educating  our  people  in  habits  of  fraud  and  perjury.  In 
theory  the  tax  is  unjust  as  a  main  source  of  public  revenue, 
since  property  is  not  the  best  measure  of  abihty  ;  and  in 
practice  "the  general  property  tax  as  actually  adminis- 
tered is  beyond  all  doubt  one  of  the  worst  taxes  known 
in  the  civilized  world."  It  has  been  abandoned  in  most 
other  countries  as  a  principal  form  of  taxation,  and  is 
condemned  by  practically  all  students  of  finance. 

§  250.  Many  of  our  American  commonwealths  levy 
poll  or  capitation  taxes.  These  are  imposed  at  a  uni- 
form rate,  at  $2  per  poll,  upon  all  males  between  the 
ages  of  20  or  21  and  45  or  60.  They  are  poorly  col- 
lected, and  are  usually  evaded  by  all  persons 
who  do  not  have  to  pay  taxes  upon  property. 
The  total  rcccij)ts,  therefore,  are  small.  In  a  few  states 
I)ayment  of  a  poll  tax  has  been  a  condition  ])recedent  to 
voting,  with  the  result  that  each  ])olitical  j)arty  paid  the 
taxes  of  many  of  its  xoters,  and  corruiJtion  necessarily 
followed.  The  |)olI  tax  has  been  abandoned  in  most 
civilized  countries,  and  must  be  \newed  as  an  antiquated 


390  GOVERNMENTAL  REVENUES 

financial  expedient.  It  is,  moreover,  unjust  in  its  opera- 
tion, since  it  exacts  equal  contributions  from  all,  regard- 
less of  the  different  abilities  of  taxpayers. 

§  251.  The  failure  of  the  general  property  tax  to  reach 
the  stocks  and  bonds  of  corporations  has  led  various 
Corporation  States  to  adopt  a  much  more  successful  ex- 
*"®^-  pedient,  the  taxation  of  the  corporations  them- 

selves ;  and  as  the  number  of  business  corporations  has 
increased,  corporation  taxes  have  become  increasingly 
important  in  state  finance.  It  is  hardly  necessary  to 
add  that  the  reason  for  the  success  of  the  new  method 
of  taxing  corporate  property  is  that  it  is  far  easier  to  deal 
directly  with  a  corporation  than  to  discover  and  assess 
its  securities  in  the  hands  of  individual  holders. 

In  its  usual  form  the  corporation  tax  applies  to  special 
kinds  of  companies,  such  as  those  engaged  in  banking, 
insurance,  railway  transportation,  or  the  tele- 
poration  graph  and  express  businesses.  Banks  are  com- 
monly taxed  upon  their  capital  stock,  the 
corporations  being  required  to  withhold  the  amount  of 
the  tax  from  the  di\ddends  paid  to  the  stock  holders ; 
and,  in  addition,  they  may  be  taxed  locally  on  their  real 
estate.  Railroads  are  taxed  in  a  great  variety  of  ways, 
as  upon  their  gross  earnings  or  the  value  of  their  outstand- 
ing securities.  When  a  road  operates  lines  in  different 
states,  the  tax  paid  in  any  one  is  levied  upon  the  amount 
of  earnings  or  securities  that  corresponds  to  the  proportion 
which  the  mileage  operated  in  that  state  bears  to  the  total 
mileage  of  the  company.  Sometimes  these  special  taxes 
on  corporations  are  in  lieu  of  all  others,  state  or  local ; 
while  in  other  cases  the  real  estate  and  other  tangible 


STATE  AND  LOCAL   TAXATION  39 1 

property  may  be  taxed  locally,  and  a  tax  upon  the  balance 
of  the  property  may  be  paid  into  the  state  treasury.  In 
some  cases  the  whole  tax  is  reserved  for  state  purposes, 
and  in  others  a  considerable  part  is  distributed  among 
the  local  governing  bodies. 

Permsylvania  and  New  York  have  established  general 
corporation  taxes  which  apply,  with  certain  exceptions, 
to  all  companies  doing  business  within  their  ^^^  ^^^^^^ 
borders ;  while  Massachusetts  and  a  few  others  corporation 

'  tax. 

have  taxes  that  apply  to  domestic  corpora- 
tions. The  diversity  of  practice  is  so  great  that  it  is 
impossible  to  enter  into  a  discussion  of  details ;  and  we 
shall  have  to  leave  the  subject  with  the  general  remark 
that  it  would  seem  desirable  to  replace  special  taxes  with 
general  laws,  which,  while  applying  to  all  corporate  enter- 
prises, should  vary  the  methods  of  procedure  so  as  to 
secure  the  best  result  in  each  case.  If  the  idea  of  reach- 
ing securities  in  the  hands  of  the  holder  is  to  be  given 
up,  and  there  is  every  reason  why  it  should,  all  corporate 
enterprises  should  be  brought  within  some  general  scheme 
of  taxation  by  which  they  would  be  adequately  taxed 
once,  and  once  only.  The  proceeds  could  be  divided 
between  state  and  local  authorities  in  such  manner  and 
proportions  as  seem  advisable. 

The  revenue  now  derived  from  corporations  by  some 
of  the  states  is  large;  and  sufficient  in  some  cases,  in 
addition  to  inheritance  and  certain  other  taxes,   separation 

,        . ,  .       .  i       r         of  state  and 

to  make  it  unnecessary  to  tax  property  tor  jpcai 
other  than  local  i)urp()ses.     It  has  often  been  "venues, 
proposed  to  separate  abscjluUly  the  sources  of  stale  and 
local  revenues,  by  abolishing  all  direct  state  taxes  ujKin 


392  GOVERNMENTAL   REVENUES 

property.  This  plan,  it  is  said,  would  remove  the  induce- 
ment for  local  assessors  to  undervalue  real  estate  in  order 
to  reduce  the  quota  of  the  direct  state  tax.  But  experience 
has  shown  that  it  is  usually  unwise  to  abohsh  all  direct 
state  taxation,  since  when  this  is  done  a  necessary  check 
on  state  expenditures  is  lost.  Some  states  that  have 
tried  the  plan  of  separation  have  finally  been  obliged  to 
reintroduce  the  direct  state  tax,  and  others  are  likely  to 
be  forced  to  similar  action.  Nor  is  separation  necessary 
for  removing  inequality  in  the  distribution  of  the  state 
tax,  because  permanent  tax  commissions,  such  as  have 
been  established  in  some  states,  can  secure  an  equalization 
of  burdens  if  they  are  given  adequate  power  to  superxise 
and  control  local  assessments. 

§  252.  License  taxes  upon  various  business  and  pro- 
fessional pursuits  have  been  often  employed  in  the  United 
License  States.  In  times  of  emergency  the  federal 
taxes.  government  has  made  extensive  use  of  them, 

but  it  now  retains  only  moderate  licenses  for  dealers  in 
malt  or  spirituous  liquors.  Practically  all  of  our  cities, 
however,  and  many  of  the  states  impose  license  taxes 
upon  certain  occupations.  In  the  cities  of  the  South 
a  very  extensive  system  of  business  taxes  exists,  which 
frequently  tends  to  restrict  competition  from  new  enter- 
prises and  bears  with  very  unequal  weight  upon  the  smaller 
establishments.  Elsewhere  licenses  are  confined  to  a 
few  occupations,  such  as  those  of  liquor  dealers,  peddlers, 
pawnbrokers,  and  the  like,  and  have  other  purposes  often- 
times than  the  mere  collection  of  revenue.  From  a  finan- 
cial point  of  view,  liquor  licenses  exceed  all  others  in 
importance,  being  oftentimes  the  source  of  lari^^  ''C venues 


STATE  AND   LOCAL    TAXATION-  393 

that  may  go  to  the  state  as  well  as  the  local  treasuries. 
In  Massachusetts  and  Xew  York,  for  instance,  the  share 
received  by  the  state  from  Kquor  licenses  is  a  very  impor- 
tant item  of  income. 

§  253.  The  inheritance  tax,  as  it  is  popularly  called, 
is  imposed  ''on  the  devolution  of  property,  whether  real 
or  personal,  whether  by  will  or  by  intestacy."  T^e  inherit- 
It  is  extensively  employed  to-day  in  Europe  ^°<=^*^- 
and  Australia ;  and  has  been  introduced,  in  some  form, 
in  most  of  our  states.  In  many  of  our  commonwealths 
only  collateral  inheritances  are  taxed,  but  in  most  cases 
direct  inheritances  are  also  included.  The  tax  has  met 
with  such  general  success  that  its  adoption  by  other  states 
seems  merely  a  question  of  time. 

In  le\'>'ing  the  inheritance  tax  it  is  customary  to  exempt 
a  certain  minimum  amount  of  property  from  its  opera- 
tion, or  to  exempt  entirely  bequests  for  educa- 

'  .         ^  ,    .  Methods  of 

tional,  charitable,  or  religious  purposes.     The  taxing  in- 

.  ,  .        ,     .  heritances. 

rate  is  oiten  progressive,  the  progression  being 
most  marked  for  inheritances  passing  to  collateral  heirs  or 
persons  not  related  in  blood.  Administration  is  not 
difficult,  since  most  estates  have  to  pass  through  the  pro- 
bate court  in  order  to  effect  a  just  distribution  of  the  assets, 
so  that,  with  proper  provision  for  gifts  passing  inter  vivos, 
the  collection  of  the  tax  is  fairly  certain  and  inexpensive. 
In  this  case  the  imposition  of  progressive  rates  can  be 
defended  because  adequate  machinery  exists  for  enforc- 
ing payment  of  the  tax.  In  the  younger  states  the  yield 
from  such  taxes  is  not  very  large,  but  they  furnish  a 
considerable  revenue  in  the  older  commonwealths,  and 
are  a  highly  desirable  form  of  state  taxation.     In  com- 


394  GOVERNMENTAL  REVENUES 

bination  with  corporation  and  license  taxes,  the  inherit- 
ance tax  should  be  developed  to  a  point  that  will  make  it 
possible  for  the  state  governments  to  lighten  materially 
the  taxation  of  property. 

§  254.  Our  various  local  governments  should  derive 
much  more  revenue  than  is  secured  at  present  from  pub- 
Local  lie  franchises  and  all  other  public  privileges, 
taxation.  There  are  many  indications  that  this  will  be 
done  in  the  near  future,  because  the  pressure  of  taxation 
has  forced  upon  the  attention  of  property  owners  the  fact 
that  valuable  franchises  are  now  given  away  without  ade- 
quate compensation.  The  receipts  from  such  sources 
would  supply  a  considerable  portion  of  the  revenues 
required  by  our  cities.  License  taxes  are  also  avail- 
able for  local  purposes;  large  receipts  already  accrue 
from  those  upon  the  sale  of  liquors,  but  others  should  be 
employed  with  moderation.  What  other  local  revenues 
may  be  needed  can  be  provided  by  taxes  upon  property 
and,  under  proper  conditions,  upon  income. 

For  the  evils  of  the  general  property  tax  certain  reme- 
dies have  been  found  during  the  past  decade.  State 
control  of  local  assessments  is  bringing  about  in  some 
commonwealths  a  better  assessment  of  real  estate.  The 
Taxation  of  taxation  of  intangible  property  has  been  re- 
propertyand  formed  in  four  or  five  states  by  introducing, 
income.  -^^  place  of  the  present  tax,  a  tax  levied  at  the 
flat  rate  of  three  or  four  mills  upon  each  dollar  of 
the  assessed  valuation.  The  lower  flat  rate  has 
yielded  more  revenue  than  was  formerly  obtained, 
and  has  secured  a  reasonably  full  and  equal  assess- 
ment.    Mortgages  have  been  exempted  from  taxation  in 


STATE  AND   LOCAL    TAXATION  395 

some  states,  and  in  others  are  now  subject  only  to  a 
registration  tax  payable  at  the  time  they  are  recorded. 
Finally,  Wisconsin  and  Massachusetts  have  introduced 
successful  income  taxes  which  replace  the  old  tax  levied 
on  intangible  property;  and  in  1919  their  example  was 
followed  by  New  York.  If  strict  control  and  supervision 
by  a  state  tax  commission  are  pro\dded,  as  in  Wisconsin 
in  connection  with  the  income  tax  and  in  Minnesota  in 
connection  with  the  three-mill  tax  on  intangible  property, 
there  is  no  reason  why  any  commonwealth  cannot  tax 
either  incomes  or  personal  property  at  a  reasonable 
rate.  The  encouraging  feature  of  the  present  situation 
is  that  there  has  been  a  great  awakening  of  interest  in 
the  subject  of  taxation,  by  which  the  inertia  of  the  past 
is  being  overcome.  The  next  decade  will  probably 
witness  marked  improvement  in  the  methods  of  local 
taxation  employed  in  the  United  States. 

FOR  SUPPLEMENTARY  STUDY 

General :  Bullock,  Selected  Readings  in  Public  Finance ;  Had- 
LEY,  Economics,  447-484;  Nicholson,  Political  Economy, 
111,254-415;  Adams,  Science  of  Finance;  Daniels,  Public 
Finance ;  Ely,  Taxation  in  American  States  and  Cities ;  Pro- 
ceedings of  the  National  Tax  Association  (1907-1919); 
SELiGiLAN',  Essays  in  Taxation;  Taussig,  Principles  of 
Economics,  Bk.  VIII. 

QUESTIONS 

1.  Does  the  Great  War  seem  likely  to  produce  any  permanent 
changes  in  the  character  of  federal  taxation? 

2.  What  have  been  the  chief  evils  in  .\merican  state  and  local 
taxation? 

3.  What   measures  are  now  being  adopted  to  remedy  these 
evils? 


WORKS   OF   REFERENCE 

[This  lisl  includes  oiily  Ihe  books  mentioned  in  the  suggestions 
for  supplementary  study.] 

Adams,  C.  C.     Commercial  Geography.     New  York,  1901. 
Adams,  H.  C.     The  Science  of  Finance.     New  York,  1898. 
Adams,  T.  S.     Labor  Problems.     New  York,  1904. 
Bastable,  C.  F.     The  Commerce  of  Nations.     London,  1892. 
Bogart,  E.  L.     Economic  History  of  the  United  States.     Second 

edition.     New  York,  1913. 
Bullock,  C.  J.     Introduction  to  the  Study  of  Economics.     Fourth 

edition.     Boston,  1913. 

.     Selected  Readings  in  Public  Finance.     Boston,  1906. 

.     Selected  Readings  in  Economics.     Boston,  1907. 

Carver,  T.  N.     The  Distribution  of  Wealth.     New  York,  1904. 
Cheyney,  E.  P.     Introduction  to  the  Industrial  and  Social  History 

of  England.     New  York,  1961. 
Clark,  J.  B.     The  Distribution  of  Wealth.     New  York,  1899. 

.     The  Problem  of  Monopoly.     New  York,  1904. 

Commons,  J.  R.     Trade  Unionism  and  Labor  Problems.     Boston, 

1905. 
Daniels,  W.  B.     Public  Finance.     New  York,  1899. 
Darwin,  L.     Bimetallism.     New  York,  1898. 
Dunbar,  C.  F.     Theory  and  History  of  Banking.     Second  edition 

New  York,  1901. 
Ely,  R.  T.     Taxation  in  .American  States  and  Cities.     New  York. 

1888. 

.     Socialism  and  Social  Reform.     New  York,  1894. 

.     Monopolies  and  Trusts.     New  York,  1900. 

Ensor,  R.  C.  K.     Modern  Socialism.     London,  1904. 

Escher,  F.     Elcmcnis    of    Foreign    Exchange.     Fourth    edition 

New  York,  1915. 

397 


398  WORKS   OF  REFERENCE 

George,  H.     Progress  and  Poverty.     San  Francisco,  1879. 
Oilman,  N.  P.     Methods  of  Industrial  Peace.     Boston,  1904. 
Greene,  T.  L.     Corporation  Finance.    Third  edition.     New  York, 

1897. 
Hadley,  A.  T.     RaUroad  Transportation.     New  York,  1885. 

.     Economics.     New  York,  1896. 

Hamilton,  J.  H.     Saving  and  Savings  Institutions.     New  York, 

1902. 
Hoxie,  R.  F.     Trade  Unionism  in  the  United  States.    New  York, 

1917. 
Jenks,  J.  W.     The  Trust  Problem.     New  York,  1900. 
Jevons,  W.  S.     Money  and  the  Mechanism  of  Exchange.    New 

York,  1875. 
Johnson,  E.  R.     American  Railway  Transportation.    New  York, 

1903. 
Kinley,  D.     Money.     New  York,  1904. 
Malthus,  T.  R.     Essay  on  the  Principle  of  Population.    London, 

1798.     Edited  by  W.  J.  Ashley.     New  York,  1895. 
Marshall,  A.     Principles  of  Economics.     Fourth  edition.     London, 

1898. 
Mayo-Smith,  R.     The  Science  of  Statistics:     Part  I.     Statistics 

and  Sociology.     Part  II.     Statistics  and  Economics.    New 

York,  1895,  1899. 
Meade,  E.  S.    Trust  Finance.     New  York,  1903. 
Menger,  A.     The  Right  to  the  Whole  Produce  of  Labor.    London, 

1899. 
Nicholson,  J.  S.       Principles    of    Political    Economy.     London, 

1893-1901. 
Phillips,  C.  A.     Readings  in  Money  and  Banking.     New  York, 

1916. 
Rae,  J.     Eight  Hours  for  Work.     London,  1894. 
Report  of  the  Industrial  Commission,  Vol.  XIX.     Final  Report. 

Washington,  1902. 
Roberts,  E.  H.     Government  Revenue.     Boston,  1884. 
Schaffle,    A.     The    Quintessence    of    Socialism.    Third    edition. 

London,  1891. 


WORKS   OF  REFERENCE  399 

Schloss,  D.  Methods  of  Industrial  Remuneration.  Third 
edition.     London,  1898. 

Seager,  H.  R.     Introduction  to  Economics.     New  York,  1904. 

Seligman,  E.  R.  A.     Essays  in  Taxation.     New  York,  igcxs. 

Shaler,  N.  S.  Nature  and  Man  in  the  United  States.  New 
York,  1891. 

Shaw,  A.  (Editor).     The  National  Revenues.     Chicago,  1888. 

Shearman,  T.  G.     Natural  Taxation.     New  York,  1895. 

Smith,  A.  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of 
Nations.  London,  1776.  Edited  by  E.  Cannan,  with  Intro- 
duction and  Notes.     New  York,  1904. 

Sumner,  W.  G.     Protectionism.     New  York,  1885. 

Taussig,  F.  W.  The  Tariff  History  of  the  United  States.  New 
York,  1888. 

.     Wages  and  Capital.     New  York,  1896. 

.     Principles  of  Economics.     New  York,  191 1. 

Vandervelde,  E.     Collectivism.     Chicago,  190T. 

Webb,  S.  and  B.     Industrial  Democracy.     London,  1897. 

White,  H.     Money  and  Banking.     Second  edition.     Boston,  1902, 

Willis,  H.  P.     The  Federal  Reserve  System.     New  York,  1915. 


INDEX 


[The  references  are  to  page  numbers.] 


AcTof  1873,  relating  to  coinage,  i6i; 
false  charges  concerning,  161-162  ; 
of  igo6,  relating  to  railroads,  226. 

Agricultural  resources  of  the  United 
States,  32-33. 

American  Federation  of  Labor,  316. 

Antitrust  acts  of  1914,  185. 

Arbitration,  voluntary,  331 ;  com- 
pulsory, 332. 

Assessments,  special,  368-369. 

Balance  of  trade,  230 ;  the  theory 
of,  238-239. 

Banks  and  the  check  system,  124- 
125;  bank  notes,  128,  151;  de- 
posit banking,  149-150;  bank  dis- 
count, 150;  banking  operations 
illustrated,  151-155;  Federal  Re- 
serve System,  157,  159;  state 
banking  in  theUnited  States,  155- 
156;  the  national  banks,  156-158. 

Barter,  difllculty  of,  116. 

Bill  of  exchange,  125-126. 

Bimetallism,  in  the  United  States, 
160-168;  demonetization  of  silver, 
160-16 1 ;  national  w.  international 
bimetallism,  164;  arguments  for 
international  bimetallism,  164- 
167 ;  opposing  arguments,  167-168. 

Birth  and  death  rates,  39. 

HIack  list,  313. 

HIandAllison  .Act,  163. 

Boards  of  equalization,  386. 

Bochm-nawerk,  K.  von,  on  socialist 
theory  of  value,  358. 

Book  credits,  123. 


Boycott,  328. 

Brassage,  120. 

Bullion  and  money,  132-133. 

Bureau  of  Corporations,  197. 

Capital,  a  factor  of  production,  45  ; 
defined,  46;  concrete  forms  of, 
47-49 ;  fixed  and  circulating,  free 
and  specialized,  49-50;  forma- 
tion of,  50-51 ;  abstinence  neces- 
sary for  formation  of,  51-53; 
facilities  for  saving,  53-54 ;  capi- 
tal and  interest,  266-274. 

Cereals,  production  of,  in  United 
States,  33. 

Clearinghouses,  124-125. 

Closed  shop,  the,  322-324. 

Coal,  production  of,  in  United 
States,  33-34. 

Coinage,  119;  free  coinage,  119; 
gratuitous  coinage,  119;  coins  of 
the  United  States,  1 20. 

Collective  Bargaining,  320. 

Competition,  defined,  100;  1\\<> 
forms  of,  100;  commercial  and 
industrial,  105  ;    failure  of,  112. 

Competition  of  markets,  217-218. 

Concentration  in  production,  83- 
84;  economies  of,  84-87;  op- 
posing forces,  87-90;  conclusion 
concerning,  91. 

Conciliation,  330. 

Consumption  of  wealth,  ddined,  13 ; 
final  and  productive  consump- 
tion, 13-14;  laws  of  consump- 
tion, 14-21;  statistics  of,  21-27. 


401 


402 


INDEX 


Continental  paper  money,  145,  147. 
Cooperation,     342 ;      distributive, 

342 ;  productive,  343. 
Cooperative  production,  60. 
Corporation  stocks  and  bonds,62-64. 
Corporation  taxes,  390. 
Corporations,    60;      defined,    61; 
growth  of,  61 ;  powers  of,  61-62  ; 
securities,    63-64;      limited   lia- 
bility,   64-65;      advantages   of, 
65-66;    accounting,  67-69;   pro- 
motion  of,  69-70;    irresponsible 
management  of,  70-72. 
Cost   of   production,   under   static 
conditions,  92;     under  dynamic 
conditions,  93-95  ;     analysis  of, 
106-108;     varying  costs  of  pro- 
duction, 108-110. 
Cotton,  production  of,  in  the  United 

States,  2,2,. 
Credit,  defined,  1 23  ;    book  credits, 
1 23 ;  promissory  notes,  1 23 ;   the 
check  and  clearing  system,  124- 
125;    the  bill  of  exchange,  125- 
126;     foreign  bills  of  exchange, 
126-128;  banknotes,  128;  effect 
of,  upon  prices,  134-136;    bank 
credits,  149-158. 
Custom,  affects  prices,  112. 
Customs  duties,  244-245,  374-376. 

Demand,  defined,  loi ;  the  law  of, 
18-19;  elasticity  of,  19,  103. 

Discriminating  railway  rates,  218- 
219. 

Distribution  of  wealth,  259 ;  the 
simplest  form  of,  262;  complex 
form  of,  262-263  ;  the  employer's 
place  in,  263-264;  the  problem 
of,  264;  interest,  265-274;  wages, 
275-283;  rent,  283-295  ;  profits, 
295-300;  attempts  to  alter  the 
present  distribution,  346-366. 

Division  of  labor,  55;  advantages 
of,  56;   disadvantages  of,  57. 


j  Division  of  occupations,  55. ' 
Dollar,  history  of,  in  United  States, 
I      120,  160-163. 
I  Domains,  public,  367. 

Economic  order  of  consumption, 
16-18. 

Economics,  defined,  4;  its  deriva- 
tion, 5;  its  relation  to  other 
sciences,  6;  its  divisions,  7-8; 
its  scope  and  value,  9. 

Employers'  Associations,  324. 

Engel's  law,  21-22. 

Entrepreneur,  functions  of,  59; 
position  of,  in  distribution,  263- 
264. 

Excess-profits  tax,  382. 

Exchange,  underlies  the  division  of 
labor,  58;   advantages  of,  97-98. 

Excise  duties,  376-379. 

Exports  from  the  United  States, 
231 ;  distribution  of,  231-232. 

Extractive  industries,  1-2. 

Factors  of  production,  32 ;  organi- 
zation of,  58-60. 

Factory  system,  82-84. 

Federal  Reserve  System,  157-159. 

Federal  taxation  in  the  United 
States,  374-385. 

Fees,  368. 

Fiat  theory,  121,  144-145. 

Fines,  368. 

FLxed  and  variable  expenses,  113- 
114,  174-175- 

Foreign  exchange,  126-128;  the 
rate  of,  127. 

Free  trade,  effect  of,  249-251. 

Freight  charges  and  the  foreign  ex- 
changes, 236-237. 

"Friendly  agreements,"  182. 

General  price  levels,  changes  in, 
129-130;  methods  of  measuring, 
130. 

General  property  tax,  385-389. 


INDEX 


403 


George,  Henr\-,  advocate  of  the 
single  tax,  346-352. 

Gold  and  silver,  production  of,  in 
the  United  States,  34-35;  have 
displaced  other  forms  of  money, 
117-118;  changes  in  world's 
output  of,  1 31-132;  cost  of  pro- 
duction of,  133;  territorial  dis- 
tribution of,  140-142. 

Gold  monometallism,  161;  argu- 
ments for,  167-168. 

Government  paper  money,  143; 
alleged  advantages  of,  143-145; 
the  case  against,  145-146;  in  the 
United  States,  146-149. 

Granger  laws,  221-222. 

Greenbacks,  147-149. 

Gresham's  law,  130-140. 

Hadley,  a.  T.,  on  effect  of  immi- 
gration, 44~45- 

Hamilton,  Alexander,  on  American 
manufactures,  256. 

Holding  company,  72. 

Household  and  social  economy,  4-5. 

Human  needs,  the  starting  point  of 
economic  inquiry,  10;  the  in- 
crease and  diversification  of,  11. 

Immigration,  influences  the  move- 
ment of  population,  41-42;  eco- 
nomic effects  of,  in  the  United 
States,  42-45. 

Imports  of  the  United  States,  231; 
distribution  of,  231-232. 

Income,  national,  259;  real  and 
money  income,  261-262. 

Income  taxes,  379-3H2. 

Index  numbers,  129-130. 

Industrial  combinations,  sc-c  "Mo- 
nopoly." 

"Industrial  Revolution,"  31. 

Industrial  Unionism,  317. 

Industrial  Warfare,  325-328;  rem- 
edies, 328-334. 


Industrial  Workers  of  the  World, 
318. 

Industries,  public,  367-368. 

"Infant-industry"  theory,  252. 

Inflation,  145-147. 

Inheritance  taxes,  393. 

Interest,  nature  of,  265-267;  rate  of, 
depends  on  suppls'  and  demand, 
266-267;  the  supply  of  capital, 
267-268;  equalization  of  supply 
and  Qcmand,  271 ;  various  classes 
of  loans,  271-272;  tendency  of 
interest  rate  to  decline,  272-273; 
short-time  loans,  273-274. 

International  movements  of  capital, 
235-236. 

International  trade,  of  the  United 
States,  230-233;  in  barter,  233- 
234;  this  fact  ex-plained,  234-235; 
various  kinds  of  international 
transactions,  235-237;  balance  of 
trade,  238-239;  is  based  on  rela- 
tive advantages  of  production, 
239-240;  the  restriction  of,  244- 

257- 
Interstate  Commerce  Law,  207,  22t,. 
Iron  law  of  wages,  355,  359. 
Iron  ore,  production  of,  in  United 

States,  34. 

Knights  of  Labor,  316. 

Labor,  economic  significance  of, 
36;  causes  affecting  efficiency  of, 
37-38;  a  commodity,  301;  a 
peculiar  commodity,  301-302; 
labor  legislation,  304-314;  labor 
organization,  314-3,34;  relation 
of  labor  to  product,  335-345- 

Labor  cost,  276. 

Labor  legislation,  in  England,  304- 
306;  in  the  United  States,  307- 
314;  its  constitutionality,  308- 
3(/^;  economic  aspects,  312. 

Labor  organizations, growth  of, 314; 


404 


INDEX 


trade  unions,  315-316;  Knights 
of  Labor,  316;  American  Federa- 
tion of  Labor,  316;  objects  of 
labor  organizations,  318-323  ;  ad- 
vantages of,  3 1 8-319 ;  the  stand- 
ard wage,  321;  the  closed  shop, 
322-323;  relation  to  output,  323; 
industrial  warfare,  325-335. 

Land  nationalization,  346. 

Large  fixed  capitals,  their  effects 
on  prices,  113-114. 

Latin  Monetary  Union,  162. 

Law  of  demand,  18-21. 

Law  of  diminishing  returns,  from 
land,  74-78;  from  labor  and 
capital,  78;  significance  of,  79- 
82 ;  its  relation  to  the  growth  of 
rent,  288-291. 

Law  of  economy  in  organization, 
82-91. 

Law  of  supply,  91-92  ;  under  static 
conditions,  92-93 ;  under  dy- 
namic conditions,  93-95 ;  in- 
creasing and  decreasing  marginal 
cost,  93-95. 

Law  of  the  variation  of  utility,  14-16. 

Legal  tender,  121. 

License  taxes,  392-393. 

Loans,  call  and  time,  152;  various 
classes  of,  271-274. 

Local  taxation  in  the  United  States, 

394-395- 
Lockouts,  326. 
Lotteries,  public,  568. 

"Magic-fxjnd"  delusion,  370. 

Malthusian  theory  of  population, 
39-41- 

Man,  a  factor  of  production,  35. 

Mann-Elkins  act,  227. 

Manufacturing  industries  in  the 
United  States,  2-3,  256. 

Market,  defined,  99 ;  extent  of  mar- 
kets, 99-100. 

Market  value,  98-103. 


Marshall,  A.,  on  value,  no. 

Mill,  J.  S.,  on  profits,  298;  on  land 
nationalization,  346-347. 

Mineral  resources  of  the  United 
States,  33-35. 

Money,  purchasers  measure  sacrifice 
in  terms  of,  18;  origin  of,  116; 
the  medium  of  exchange,  117; 
the  money  metals,  118;  coinage, 
1 19-120;  the  fiat  theory,  121- 
122;  other  functions  of  money, 
122;  credit  substitutes  for 
money,  123-128;  the  value  of 
money,  128-136;  Gresham's  law, 
136-140;  the  territorial  distribu- 
tion of,  140-142 ;  government 
paper,  143-149;  monometallism 
and  bimetallism,  160-168. 

Monopoly,  defined,  169;  is  seldom 
absolute,  169-170;  legal  monopo- 
lies, 171;  natural  monopolies, 
171-173;  capitalistic  monopolies, 
173;  monopoly  value,  173-176; 
public  policy  with  respect  to 
natural  monopolies,  176-183; 
various  forms  of  capitalistic  mo- 
nopolies, 182-185 ;  arguments 
in  favor  of  combination,  187; 
these  arguments  critically  con- 
sidered, 187  ;  recent  move- 
ments in  the  United  States,  191- 
192;  monopoly  and  privilege, 
192-193  ;  influence  of  the  tariff, 
191-193  ;  trusts  and  prices,  195- 
196;  remedies  for  capitalistic 
monopolies,  195-200. 

National    banking  system,    155- 

159- 

National  income,  259 ;  limited  by 
capital,  260;  real  and  money  in- 
come, 261-262. 

Natural  condition  affecting  Ameri- 
can industry,  32-35. 

Nature  a  factor  of  production,  32. 


INDEX 


405 


Non-competing      groups      among 

laborers,  279-281. 
Normal  value,  103-111. 

Occupations,  statistics  of,  1-4- 
Ocean  freight,  236. 


Partxership,  60. 

Personal  and  professional  service, 

3- 
Piece  wages,  275-276,  335. 

Poll  taxes,  389. 

Pools,     182-183;      railway,     206- 

207. 
Population,  natural  increase  of,  39- 

41- 
Price,    defined,    99;       changes    m 

general  level  of  prices,  129-130. 
Production  of  wealth,  defined,  29; 

stages  in  development  of,  29-31 ; 

a  social  process,   55;     laws  of, 

74-96- 
Products     and     by-products,     the 

value  of,  114-115. 

Profit  defined,  284,  295  ;  gross  and 
net  profits,  295;  marginal  pro- 
ducer receives  no  profit,  297 ; 
the  amount  of  profits,  298; 
profits  a  personal  income,  299; 
profits  a  surplus,  299.  1 

Profit  sharing,  336. 

Progressive  taxation,  373. 

Progressive  wages,  335. 

Promissory  note,  123. 

Proportional  taxation,  373. 

Prosperity,  test  of,  23-27. 

Protective  tariffs,  246-257. 

Public  ownership  of  natural  monop- 
olies, its  advantages,  178;  its 
disadvantages,  179;  the  lesson 
of  experience,  179-180;  conclu- 
sion, 180-182;  of  railroads,  228- 
229. 

Public  revenue,  367-396. 


Railroads,     construction    of,    in 
United  States,  202-203  ;   charac- 
ter of  early  roads,  203  ;    railway 
cooperation,    203;    trunk    lines, 
204 ;    railroad  systems,  204-205  ; 
growth  of  competition,  205-206; 
progress  of  combination,  206-2x2  ; 
methods  of  railway  consoHdation, 
208-209 ;  results  of  consolidation, 
209-210;    reasons  for  consolida- 
tion, 2 10-2 II ;  railway  rates,  212- 
220;  freight  rates,  213-214;  rate 
making,  214 ;   different  classes  of 
traffic,  215;  discriminating  rates, 
216-219;    public  control  of  rail- 
roads, 220-229;    early  policy  to- 
ward railroads,  220;    the  public 
character  of  the  industry,   221; 
state  commissions,  222-223;   In- 
terstate   Commerce    Law,    223- 
226;  our  future  policy,  227-229. 
Rent,  defined  and  explained,  284- 
285;     not  to  be  confused  with 
interest,   285-286;     depends  on 
demand  for  land,  286;     various 
classes  of  rents,  286-288;     rent 
and    diminishing    returns,    288- 
291 ;    not  a  cause  of  high  prices, 
201-293;      as   an   unearned   in- 
come, 293. 
Revenue  tariffs,  245-246. 
Risk,  affects  rate  of  interest,  272. 

Saving    and    savings    institutions, 

S3-S4- 
Scientific  management,  339. 
Seigniorage,  120. 

Sherman  Anti-Trust  Act,  183-184. 
Shop  councils,  330. 
Silver    movement    in    the    United 

States,  163-164. 
Single  tax,  346-348;    criticism  of, 

348-349 ;    conclusion,  348-3SO- 
Smith,  Adam,  on  the  scope  of  the 

science  of  economics,  8 ;   on  divi- 


406 


IN-DEX 


sion  of  labor,  56,  58 ;  on  corpo- 
ration management,  89-90;  on 
taxes,  371. 

Social  sciences,  enumerated,  6. 

Socialism,  defined,  352;  its  his- 
tory, 353  ;  modern  basis  of, 
354;  alleged  tendency  toward, 
356;  supposed  advantages  of, 
356;    criticism  of,  357-365. 

Sociology,  6-7. 

Specific  and  ad  valorem  duties,  244- 
245. 

Stages  in  development  of  produc- 
tion, 29-31. 

Standard  of  living,  defined,  41 ; 
further  considered,  279-281 ;  its 
relation  to  wages,  281-283. 

Standard  wage,  the,  321. 

State  taxation  in  the  United  States, 

385-395- 
Stock  exchanges,  66. 
Strikes,  328. 
Supply,  defined,  101-102 ;   the  laws 

of,  91-96. 

Tariff  on  imports,  its  relation  to 
the  growth  of  trusts,  193-195; 
specific  and  ad  vaiorem  duties, 
244-245  ;  revenue  and  protective 
tariffs,  245-246;  effect  of,  246- 
249  ;  present  and  future  effect  of 
protection,  251-252;  the  burden 
of  protective  duties,  253 ;  the 
tariff  and  wages,  254-256;  the 
tariff  and  the  diversification  of 
industry,  256-257;  our  future 
policy,  257. 

Taxes,  defined,  369;  the  just  dis- 
tribution of,  371-395;  the  vari- 
ous taxes  employed  in  the  United 
States,  374-396. 

Time  wages,  275-276,  2>35- 

Trade  unions,  315. 


Transaction  taxes,  379. 

Travellers'  expenditures  and  the 
foreign  exchanges,  237. 

Trunk  lines,  204. 

Trusts,  183-184;  the  trust  move- 
ment in  the  United  States,  183- 
193- 

Undertaker,  59. 

Unearned  increment,  293-295,  350- 

35  In- 
utilities,   include    material    com- 
modities  and   personal   services, 
11-12. 
Utihty,  defined,  11 ;    four  kinds  of, 
12 ;  margmal  and  total  utihty,  15.- 

Value,  defined,  98-99;  the  deter- 
mination of  market  value,  100- 
103;  the  equalization  of  supply 
and  demand,  102-103  ;  normal 
value,  103-111 ;  analysis  of  cost 
of  production,  io6-io8;  mar- 
ginal cost  of  production,  no; 
exceptions  to  the  theory  of  nor- 
mal value,  1 1 2-1 15;  monopoly 
value,  173-176. 

Variation  of  the  efficiency  of  pro- 
ductive forces,  74. 


Wages,  in  the  United  States,  254- 
256;  defined,  275;  time  and 
piece  wages,  275,  335  ;  labor  cost, 
276;  the  rate  of  wages,  276-277; 
the  demand  for  labor,  277-279; 
the  supply  of  labor,  279-281 ;  the 
normal  wage,  282  ;  the  family  the 
economic  unit,  283 ;  the  standard 
wage,  321. 

Wants,  existence  and  culture,  10; 
are  satiable,  14. 

Waterways  in  the  United  States,  35. 

Wealth,  defined,  12-13. 

Welfare  work,  338. 


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